DOL Action Expands 401k Access to Private Equity

Last week, the Department of Labor provided an information letter to confirm that companies with 401(k) plans can now offer private equity options to their employees.

Presently, 401(k) plan fiduciaries do not provide plan participants with private equity choices due to the risk of litigation from plan participants that allege excessive fees or underperformance. The new information letter should limit frivolous litigation by clarifying that 401(k) investment options may include an allocation to private equity funds, so long as a plan fiduciary has evaluated the risks and benefits of doing so.

A copy of the Department of Labor letter is available HERE and its final paragraph summarizes its new guidance: “In conclusion, 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 an ERISA covered individual account plan in the manner described in this letter.”

In 2015, a lawsuit was filed against Intel by a former employee that accused the company’s retirement plans and administrators of breaching their fiduciary duty by placing an overly heavy emphasis on hedge funds and private equity. Later, in 2016, a plan member filed a similar suit that accused Verizon and Fidelity Investments of violating fiduciary duties under ERISA.

“The DOL’s information letter is a major step towards providing US retirees that have over $6 trillion in 401(k) retirement savings with access to the high returns and diversification benefits of private equity,” said Hal Scott, the President of the Committee on Capital Markets Regulation and Emeritus Nomura Professor, Harvard Law School. The Committee on Capital Markets Regulation (CCMR), is an independent research organization with thirty-five members drawn from the finance, law and academic sectors.

In addition to supporting the DOL action, Jay Clayton, the chairman of the Securities and Exchange Commission, has also indicated that the SEC is considering expanding retail investor access to private equity which is presently only available to accredited investors. The CCMR has recommended expanding retail investor access to private equity through registered closed-end funds that primarily invest in private equity funds. Presently, only accredited investors with substantial net worth or high incomes can invest in such funds. According to research by the CCMR, 98% of U.S. households cannot invest directly in private equity.

“The SEC does not need to issue a new rulemaking to expand retail investor access to private equity,” said John Gulliver, the executive director of the CCMR. “Rather, the SEC can simply allow closed-end funds that primarily invest in private equity funds to register without limiting access to accredited investors. The necessary investor protections for retail investors are in place, as registered funds must provide extensive disclosures as to investment risks and fees.”

“The SEC should indicate its willingness to expand retail investor access to private equity funds through registered closed-end funds now,” added Professor Scott.

The report from the CCMR, “Expanding Opportunities for U.S. Investors and Retirees: Private Equity”, is available by clicking HERE.

Private Equity Professional | June 9, 2020

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