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DOL Issues Information Letter on Private Equity Investments in Designated Investment Alternatives for Individual Account Plans
Practical Law Legal Update w-025-8615 (Approx. 4 pages)
DOL Issues Information Letter on Private Equity Investments in Designated Investment Alternatives for Individual Account Plans
by Practical Law Employee Benefits & Executive Compensation
| Published on 08 Jun 2020 • USA (National/Federal) |
The Department of Labor (DOL) has issued an information letter addressing the use of private equity investments in designated investment alternatives for individual account plans, such as 401(k) plans. According to the DOL, plan fiduciaries do not violate their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by including asset allocation funds that invest in private equity investments as designated investment alternatives, provided certain conditions are met.
On June 3, 2020, the DOL issued an information letter addressing the use of private equity investments in designated investment alternatives for individual account plans, such as 401(k) plans. According to the DOL, plan fiduciaries do not violate their fiduciary duties under ERISA by including asset allocation funds that invest in private equity investments, subject to certain conditions.
DOL Information Letter
ERISA Sections 403 and 404 (29 U.S.C. §§ 1103 and 1104) impose various obligations on plan fiduciaries, including the duty to prudently select and monitor available investment options for participant-directed individual account plans (see Practice Note, ERISA Fiduciary Duties: Overview).
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. For example, the private equity investments may not be offered as a stand-alone investment option.
The DOL noted that private equity investments present different issues for individual account plans than they do for defined benefit plans. For example, the DOL explained that private equity investments involve more complex structures and valuations, longer time horizons, higher fees, and different disclosure requirements than the publicly traded securities typically included as investment options 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, including whether:
- Adding the asset allocation fund would increase the diversification of investment options.
- The plan fiduciaries monitor the fund themselves (using outside investment experts, if necessary), or qualified investment professionals manage the asset allocation fund.
- The asset allocation fund:
- limits the allocation of investments to private equity in a way that accounts for the particular characteristics of such an investment (for example, the complexity, higher fees, disclosure requirements, and liquidity); and
- has features concerning liquidity and valuation that allow participants to take benefits and make exchanges with other plan investments, consistent with the plan's terms.
In addition, the DOL noted that, 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 (for example, participant ages and normal retirement age).
- Whether the plan fiduciaries have the skills and experience needed to make the determination or whether they should seek assistance from an investment professional.
- Whether participants will be given adequate information about the nature of the fund so they can make informed investment decisions. The DOL indicated that this consideration is "especially important" for plan fiduciaries relying on the safe harbor in ERISA Section 404(c) (see Practice Note, ERISA Fiduciary Duties: Overview: Participant-Directed Investments and ERISA Section 404(c) Checklist) and when deciding if the investment alternative should be used as a qualified default investment alternative (QDIA) (see Practice Note, Qualified Default Investment Alternatives (QDIAs)).
Fiduciaries must periodically consider whether the asset allocation fund continues to be a prudent investment option.
Practical Implications
The DOL's Information Letter is helpful in clarifying that asset allocation funds that have private equity investments as a component of a multi-asset fund can be suitable investment options for individual account plans. However, as the Information Letter cautions, plan fiduciaries must evaluate these types of funds carefully to ensure that the funds are appropriate given their plan's features and participant population. In most instances, unless they have very deep investment knowledge, plan fiduciaries will likely want to hire experts to help them decide if such an investment alternative should be added to the plan's investment lineup.