In a surprise announcement, the Department of Labor (DoL) issued an Information Letter in June 2020 that paves the way for investors to access private equity funds via their employer-sponsored retirement accounts.1 The guidance from the DoL, which governs 401(k) retirement accounts, addresses an inquiry seeking to clarify whether private equity investments can be used as a component of a professionally managed asset allocation fund in individual account plans.
While proponents support the potential to generate higher returns and increase diversification, critics argue the inherent illiquidity and complex fee structures of private equity funds pose unsuitable risks for most retail savers.
Although defined benefit (DB) plans and endowments have invested in private equity for years, defined contribution (DC) plans have largely avoided private investments due to litigation fears under ERISA. The private equity industry has advocated for greater parity between DB and DC investment options and, while the information letter does not provide all-out approval, the guidance may serve as a milestone for plan fiduciaries to offer private equity within 401(k) plans.
We unpack the new guidance, including key implications for the alternative investment and defined contribution industries, respectively:
- The democratization of alternative investments continues
- Long-term tailwind for private equity firms but litigation fears will likely hinder near-term asset growth
- Regulatory guidance from DoL and SEC in lockstep