On December 21, 2021, the DOL issued a supplemental statement that clarifies Information Letter 06-03-20 (information letter), which addressed the use of private equity investments in designated investment alternatives for individual account plans, such as 401(k) plans. The supplemental statement clarifies that the information letter should not be interpreted as saying that private equity investments, when offered as part of a designated investment alternative, are generally appropriate for a typical 401(k) plan.

In the information letter, the DOL explained that fiduciaries of individual account plans may include an asset allocation fund that invests in private equity investments as a designated investment alternative, subject to certain conditions (see Legal Update, DOL Issues Information Letter on Private Equity Investments in Designated Investment Alternatives for Individual Account Plans).

Before adding an asset allocation fund with private equity investments as an investment option for an individual account plan, plan fiduciaries must consider the risks and benefits. When considering whether to add an asset allocation fund with private equity investments, plan fiduciaries should also consider the plan's features and participant profile, and whether the plan fiduciaries have the skills and experience needed to make the determination or whether they should seek assistance from an investment professional (see Practice Note, ERISA Fiduciary Duties: Overview).

After issuing the information letter, the DOL received questions and comments from the public, and the SEC's Office of Compliance Inspections and Examinations issued a risk alert on compliance issues in examinations of registered investment advisers that manage private equity funds or hedge funds, including fees, expenses, and conflicts of interest.

The DOL issued the supplemental statement to ensure that plan fiduciaries do not expose plan participants and beneficiaries to unwarranted risks by misreading the information letter as saying that a private equity investment alternative is generally appropriate for a typical 401(k) plan.

The supplemental statement acknowledges that the information letter to some extent reflected the perspective of the private equity industry, and it did not include opposing views. Members of the public who commented on the information letter wrote that private equity investments may not be appropriate for the retirement plans of all workers. They also expressed concerns about the adequacy of investment disclosures that would be provided to retirement plan participants and beneficiaries who lack investing knowledge and experience.

The supplemental statement also reiterates the information letter's admonition that a plan fiduciary must have sufficient expertise to evaluate the appropriateness of including a private equity investment as an alternative investment in a participant-directed individual account retirement plan (see Practice Note, ERISA Fiduciary Duties: Overview: Participant-Directed Investments).

A fiduciary who has experience evaluating private equity investments for inclusion in a defined benefit plan may be suited to analyze those investments for a participant-directed individual account plan, particularly with the assistance of a qualified fiduciary investment adviser.

The information letter was concerned with plan fiduciaries who offer both defined benefit and defined contribution plans, and who may invest in private equity for their defined benefit plans, but do not include private equity investments for their defined contribution plans out of fear of liability. In the supplemental statement, the DOL cautions against application of the information letter outside of that context. The supplemental statement indicates that 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.

Fiduciaries of individual account retirement plans should be aware of the DOL's supplemental statement. The information letter was concerned with plan fiduciaries who offer both defined benefit and defined contribution plans, and who may invest in private equity for their defined benefit plans, but do not include private equity investments for their defined contribution plans out of fear of liability. In the supplemental statement, the DOL cautions against application of the information letter outside of that context. The supplemental statement also indicates that 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.