The U.S. Department of Labor has issued an information letter indicating that retirement savers can include certain private equity investments in their defined contribution plans, such as 401(k)s.
In its Wednesday announcement, the DOL pointed to President Trump’s recent pandemic-related executive order that directed agencies “to remove barriers to the greatest engine of economic prosperity the world has ever known: the innovation, initiative, and drive of the American people” in order that we may “overcome the effects the virus has had on our economy.”
The information letter, issued under the Employee Retirement Income Security Act (ERISA) as a response to an inquiry by Pantheon Ventures, addresses private equity investments that are offered as part of a professionally managed multi-asset class vehicle structured as a target date, target risk, or balanced fund. However, the letter does not authorize making private equity investments available for direct investment on a standalone basis.
“This information letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns,” said Labor Secretary Eugene Scalia. “The letter helps level the playing field for ordinary investors and is another step by the [DOL] to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”
According to the DOL, private equity investments have long been part of the investment portfolios used by defined benefit plans to fund retirement benefits for many American workers, but they generally have not been incorporated into investment funds used by defined contribution plans, such as 401(k) plans.
Rather, 401(k) plans generally use mutual funds, bank collective investment trusts, and insurance company pooled accounts with portfolios focused on publicly traded stocks and bonds.
The DOL claims that adding private equity investments to these professionally managed investment funds would increase the range of investment opportunities available to 401(k)-type plan options.
“The Department of Labor announcement opens the door to a more diversified platform of alternative investment solutions for plan fiduciaries to consider in the future, including non-listed REITs and BDCs, which can importantly provide investors options to diversify their portfolios,” said Tony Chereso, president and CEO of the Institute for Portfolio Alternatives, a trade group representing the alternative investment industry.
Chairman of the U.S. Securities and Exchange Commission Jay Clayton commended the DOL’s efforts, saying the information letter, “will provide our long-term Main Street investors with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies pursued by many well-managed pension funds as well as the benefit of selection and monitoring by ERISA fiduciaries.”