DOL Pulls Back on Private Equity in 401(k)s

Regulators emphasize prudent evaluation of funds with private equity holdings

Stephen Miller, CEBS By Stephen Miller, CEBS January 11, 2022
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DOL Pulls Back on Private Equity in 401(k)s

The U.S. Department of Labor (DOL) released a statement clarifying a position taken by the prior administration on private equity as holdings within mutual funds that 401(k) and similar defined contribution plans offer as investment options.

Private equity refers to investments in companies that are not publicly traded.

The Dec. 20, 2021, Supplement Statement on Private Equity in Defined Contribution Plan Designated Investment Alternatives, from the DOL's Employee Benefits Security Administration, was in response to concerns that the prior administration's June 2020 information letter could be seen as broadly endorsing the benefits of private equity investments—outside the letter's limited context—while downplaying associated risks.

The 2020 letter had stated that the DOL "believes that a plan fiduciary of an individual account plan may offer an asset allocation fund with a private equity component" in a manner consistent with requirements under the Employee Retirement Income Security Act, including within a custom-designed target-date, target-risk or balanced fund used as the default investment when new employees are automatically enrolled into a 401(k) or similar plan. It also advised plan fiduciaries, when making such a selection, to "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."

The new statement stresses provisions in the information letter on the fiduciary expertise needed to evaluate and monitor private equity investment options.

"After considering reactions to the Information Letter by stakeholders, the department concluded it was important to release a statement cautioning fiduciaries—especially in small plans—against marketing efforts that may misrepresent the Information Letter as a U.S. Department of Labor endorsement or recommendation of these investments for 401(k) plans," said acting Assistant Secretary for Employee Benefits Security Ali Khawar.

A Change of Course

"While the Supplement does not slam the brakes on private equity investments in 401(k) plans, it emphasizes the tension between the current DOL's views and those of the prior administration," wrote William Marx, an associate at law firm Morgan Lewis in Philadelphia, and Julie Stapel, a partner in the firm's Chicago office. "As we have seen in other contexts, such as environmental, social and governance (ESG) investing and proxy voting, this tension has evolved into a sort of regulatory pingpong match [between Republican and Democratic administrations] that we expect may continue," they noted.

Last October, the DOL proposed removing barriers put in place by the prior administration that would have limited plan fiduciaries' ability to consider climate change and other ESG factors when selecting retirement plan funds and exercising shareholder proxy voting rights, and, instead, encouraging fiduciaries to consider ESG concerns as part of their decision-making. The proposed rule has not yet been finalized.

[added: 1/19/22]

Another View: Role for Diversified Investments

"Diversification is going to be increasing important going forward and plan sponsors are recognizing that this includes access to private markets," said Katie Hockenmaier, U.S. defined contribution research director at HR consultancy Mercer, during a January Mercer webcast.

"We're having conversations around how private equity, private real estate and infrastructure fits into" defined contribution plans, Hockenmaier said. 

Regarding the DOL's guidance and the "slight change in tone from what we had under the prior administration," she noted, "we don't think it necessarily means [the DOL] is precluding anyone from including these types of investment options. We think it is refocusing fiduciaries on making sure that every aspect of the evaluation process is very well vetted, given that there are some unique elements regarding liquidity [with private equity], which is something [the DOL] thought was particularly important to call out to plan sponsors who might be venturing down that path."



Related SHRM Articles:

DOL Proposes Rule to Support ESG Funds in Retirement Plans, SHRM Online, October 2021

DOL Gives OK to Private Equity in Diversified 401(k) Funds, SHRM Online, June 2020

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