September 28, 2020

Volume X, Number 272

September 28, 2020

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DOL Information Letter Outlines Fiduciary Considerations for Including Private Equity Allocations in Defined Contribution Plan Investments

On June 3, 2020, the Department of Labor (the “DOL”) published an Information Letter confirming that investment options under a defined contribution plan (e.g., a 401(k) or 403(b) plan) may include a limited allocation to private equity.  Notably, the Letter does not discuss direct investment in private equity funds (for example, by adding a PE fund to the plan’s investment lineup).  Rather, the Letter discusses including private equity as a small allocation within a diversified designated investment option such as a balanced fund or a target date fund (a footnote in the Letter suggests no more than 15%); and the Letter notes that direct investment in private equity would “present distinct legal and operational issues.”

The Letter emphasizes that selection and monitoring of an investment option with private equity is subject to the same fiduciary considerations as other investments (including the duties to be prudent and loyal, and the duty to avoid prohibited transactions).  At a high level, this includes evaluating whether the potential upside from the investment justifies the added risk, fees, complexity, and valuation and liquidity issues.  The Letter lists the following specific considerations:

  • Whether the investment option is sufficiently diversified to mitigate risk over a multi-year period;

  • Whether the investment option is overseen by plan fiduciaries (using third-party investment experts as necessary) or managed by investment professionals with the appropriate private equity-related expertise;

  • Whether the allocation within the investment option to private equity is sufficiently limited to address cost, complexity, disclosure, liquidity and valuation issues unique to the asset class (again, a footnote suggests no more than 15%);

  • Whether the investment option is appropriate for the participant profile (including, for example, participant ages, normal retirement age, anticipated employee turnover, and contribution and withdrawal patterns) and aligns with the plan’s characteristics and needs of plan participants;

  • Whether the plan fiduciary has the skills, knowledge and experience to make the required determinations regarding adding and monitoring such allocation, or whether it needs to seek expert guidance; and

  • Whether participants will be furnished adequate information regarding the character and risks of such an allocation (in particular, for plan fiduciaries relying on the protection provided under ERISA Section 404(c)).

Although the Letter includes detail that is unique to the private equity asset class, it does not change the law or general fiduciary responsibilities with respect to defined contribution plans.  In fact, some defined contribution plans have had private equity and other alternative asset allocations within their investment options for years; and challenges to the prudence of those investments are actively being litigated.  Also, the Letter references, and does not resolve, additional issues that might arise under ERISA’s prohibited transaction rules, as well as under securities, banking, tax, and other laws.

© 2020 Proskauer Rose LLP. National Law Review, Volume X, Number 157

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About this Author

Ira G. Bogner, Tax, Employee Benefits, ERISA, Attorney, Proskauer, Law firm
Partner

Ira G. Bogner is Chair of the firm’s Tax Department and a member of the Employee Benefits, Executive Compensation & ERISA Litigation Group.

Ira has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including the investment of plan assets, the implementation of employee benefit plans, employee benefit issues in mergers and acquisitions, the awarding of equity-based compensation, and the negotiation and drafting of employment agreements and severance arrangements.

212-969-3947
Seth Safra, Proskauer Law Firm, Employee Benefits, Executive Compensation and ERISA Litigation Attorney
Partner

Seth Safra is a partner in the Employee Benefits & Executive Compensation Group, where he counsels clients on all aspects of employee benefits and executive compensation.

Seth advises clients on ERISA and other related laws with respect to the design and administration of qualified and non-qualitied retirement plans, including defined contribution (including 401(k) and ESOPs) and cash balance plans. In addition, Seth counsels clients on their health & welfare plans, including advising on issues related to health care reform.

Seth represents companies in connection with executive employment, severance, equity and all other types of executive compensation arrangements, including incentive arrangements, deferred compensation and 409A compliant plans. He advises companies on employee benefits and executive compensation aspects in connection with mergers and acquisitions.

Seth frequently represents clients before the Department of Labor, Internal Revenue Service, and other government agencies.

202-416-5840
Adam W. Scoll, Tax, Private Investment Funds Attorney, Proskauer, law firm
Senior Counsel

Adam W. Scoll is a senior Associate in the Tax Department and a member of the Private Investment Funds Group. He has been practicing in the field of employee benefits and executive compensation law since 2001.

Adam has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including the investment of plan assets, the implementation of employee benefit plans, employee benefit issues in mergers and acquisitions, the awarding of equity-based compensation, and the negotiation and drafting of employment agreements and...

617-526-9486
Pamela A Onufer, Labor, Employment, Attorney, Proskauer, Law Firm
Associate

Pamela A. Onufer is a senior Associate in the Labor & Employment Law Department and practices exclusively in the areas of ERISA and executive compensation.

With special emphasis on ERISA’s fiduciary and prohibited transaction rules, Pamela assists both single employer and multiemployer benefit plan clients with reviewing and negotiating various investment-related agreements and documents.

973-274-3260
Kaitlin E. Hulbert Employment Lawyer Proskauer Law Firm
Associate

Kait Hulbert is an associate in the Tax Department and a member of the Employee Benefits & Executive Compensation Group. Kait earned her J.D. from the University of California, Los Angeles, where she was an editor-in-chief of the Entertainment Law Review. While at UCLA, she worked as a legal intern for NBCUniversal.  

310-284-5643