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DOL “Clarifies” Guidance on Private Equity Investments In Defined Contribution Plans

by | Feb 2, 2022 |

It has been a frequently stated observation that the policy position of the Department of Labor (“DOL”) on pension issues may vary a bit with the party occupying the White House. A recently issued supplemental statement by the DOL regarding its 2020 Information Letter (see also our June 10, 2020 Law Alert) on the use of private equity investment alternatives in individual account plans indicates there has been a shift, though whether it is due to political headwinds or a simple calibration of analytics by DOL staff is fair game for debate.

The 2020 Information Letter stated that a plan fiduciary would not violate a fiduciary’s duties under ERISA solely by reason of offering a professionally managed asset allocation fund with a private equity component. In no case would the private equity component of the asset allocation fund be available as a vehicle for direct investment by plan participants on a standalone basis, which would have presented distinct legal and operational issues for plan fiduciaries. That analysis continues to be the DOL position. In the 2021 Supplemental Statement, the DOL stated that the 2020 Information Letter was not an endorsement or recommendation of private equity investments. The DOL recited a number of factors that a plan fiduciary would need to take into account before making such an investment. The 2020 Information Letter and the 2021 Supplemental Statement had explained that, as with other complex investments, the responsible plan fiduciaries were responsible for securing sufficient information to understand the investment and its attendant risks prior to making the investment. The 2020 Information Letter also identified a list of factors which the relevant fiduciary should consider before including an investment vehicle with a private equity component as a designated investment alternative, noting that including these investments in participant-directed accounts presented considerations different from those involved in defined benefit plans.

The DOL indicated that it was issuing the Supplemental Statement to ensure that plan fiduciaries do not expose plan participants to unwarranted risk by misreading the letter as saying that a private equity fund is generally appropriate for a typical 401(k) plan. The Supplemental Statement then made the unusual comment that recitations of representations in the Information Letter regarding the claimed benefits of private equity investments reflected the perspective of the private equity interest, and were not balanced with counter-arguments and research from other sources. Second, the DOL shared stakeholder concerns about the ability of plan sponsors and other plan level fiduciaries in a typical 401(k) plan to satisfy the conditions set forth in the Information Letter.

In the concluding substantive paragraph of the Supplemental Statement, the DOL indicated that a plan-level fiduciary who has experience in evaluating private equity investments in a defined benefit pension plan may be suited to analyze these investments in a participant-directed individual account plan, particularly with the assistance of a qualified fiduciary investment adviser. However, except in these limited circumstances, “plan-level fiduciaries of small individual account plans are not likely suited to evaluate the use of private equity investments in designated investment alternatives in individual account plans,” although not explaining why such plan fiduciaries cannot compensate for their lack of expertise by hiring a qualified fiduciary investment adviser. While the Supplemental Statement does not modify any of the legal positions in the 2020 Information Letter, it will certainly have a chilling effect on a plan sponsor’s inclination to include private equity investments in its investment platform. Mor\eover, while the Supplemental Statement was limited to private equity investments, the same legal analysis would also apply to other types of complex investments, such as bitcoin or other cryptocurrency investments.

We note that the Supplemental Statement took into consideration the deficiencies noted by the SEC in its June 23, 2020 Risk Alert concerning compliance issues for registered investment advisers that manage private equity and hedge funds. The DOL clearly considered the implications of the SEC findings as it calibrated and walked back its level of endorsement for private equity. When all is said and done, however, the Supplemental Statement, like the 2020 Information Letter, stands for the proposition that there are no specific investment strategies or products that are disallowed, or endorsed, under ERISA. It is the obligation of a plan fiduciary experienced in such matters to make prudent and loyal decisions on behalf of the plan to evaluate and monitor alternative forms of investment.