DOL’s Latest Step to Expand Investment Opportunities for Retirement


While the effects of Covid-19 continue to take a toll on the economy, the Department of Labor is taking constructive steps to offset the impact. On June 3 the Department’s Employee Benefits Security Administration (EBSA) issued an Information Letter that essentially blessed the use of private equity investments as investment options in Employee Retirement Income Security Act of 1974 (ERISA) plans, subject to certain conditions.

Employee-sponsored defined benefit (DB) retirement plans have long invested in private equity funds, while due to litigation risk for sponsors and fiduciaries, defined contribution (DC) plans, such as 401(k) plans, have not. This disparity has limited investment options for plan participants, especially as private-sector employers have shifted away from DB plans. As existing literature has found, returns of private equity funds have historically outperformed public equity markets, while also offering portfolio diversification benefits.

Expanding access to private markets for non-accredited investors is a goal that SEC Chairman Jay Clayton has repeatedly expressed support for, although current SEC regulations allow only “accredited investors” to invest directly into private equity funds. As Patomak Global Partners CEO Paul Atkins has discussed, the number of public offerings in the U.S. has steadily declined, with U.S. companies raising more equity from private offerings restricted to such sophisticated investors as pension, sovereign-wealth and hedge funds, than through IPOs that are available to the general public. Giving 401(k) plan participants access to this untapped resource with the benefit of fiduciary oversight should benefit ordinary Americans investing for retirement.

The Letter issued by EBSA specifically expresses the Department’s view on private equity investments offered as part of a professionally managed multi-asset-class vehicle, structured as a target date, target risk, or balanced fund. It does not, however, authorize making private equity investments available for direct investment on a standalone basis.

According to the letter, “A plan fiduciary would not, in the view of the Department, violate the fiduciary’s duties under section 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for a participant directed individual account plan.”

The Letter also expresses that the use of such investments in defined contribution plans presents additional considerations, different from those involved in a defined benefit plan. As such, “In making such a selection for an individual account plan, the fiduciary must engage in an objective, thorough, and analytical process that compares the asset allocation fund with appropriate alternative funds that do not include a private equity component, anticipated opportunities for investment diversification and enhanced investment returns, as well as the complexities associated with the private equity component.”