June 12, 2020
The Department of Labor (DOL) recently issued an information letter under the Employee Retirement Income Security Act (ERISA) making it clear that fiduciaries of defined contribution plans — e.g., 401(k) plans — may prudently include private equity as a component of a professionally managed multi-asset class vehicle structured as a custom target date, target risk or balanced fund.
To that end, the letter provides an important roadmap for plan sponsors to establish a prudent ERISA process when evaluating and monitoring investments that include private equity. The letter does not authorize the direct investment by plan participants in private equity.
ERISA Fiduciary Considerations
ERISA fiduciaries must discharge their duties “solely in the interest of the plan’s participants and beneficiaries and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
These standards require a 401(k) plan fiduciary to prudently select and monitor investment options and “engage in an objective, thorough, and analytical process that considers all relevant facts and circumstances ...”
DOL’s View on Investment Options With a Private Equity Component
A plan fiduciary does not violate the fiduciary’s duties solely because the fiduciary offers an investment fund with a private equity component. However, the DOL advises fiduciaries to consider a number of factors when evaluating any such fund.
An information letter is not binding on the DOL or private plaintiffs, so it is not clear what impact the letter will have on defined contribution plans or market practices generally. Those plan sponsors that wish to evaluate funds with private equity components should take care to address the considerations the DOL notes and pay attention to inherent valuation issues associated with private equity investments and ERISA’s prohibited transaction rules. Engaging a third-party financial expert may be useful to buttress the prudence of the evaluation process. Note also that the letter reflects the current views of the current administration, either or both of which could change.
For questions regarding the information letter or qualified plan investments generally, please contact any member of the McGuireWoods employee benefits team.