January 24, 2022

Volume XII, Number 24

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January 24, 2022

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DOL Statement on Private Equity Investment Emphasizes Fiduciary Responsibility

On December 21, 2021, the Department of Labor (the “DOL”) published a Supplemental Statement (the “Supplemental Statement”) to its June 3, 2020 Information Letter (the “2020 Letter”) addressing fiduciary considerations for including private equity within an investment option under an ERISA-covered defined contribution plan (e.g., a 401(k) or 403(b) plan).  In response to questions and reactions that the DOL received from a “range of stakeholders” regarding the 2020 Letter, as well as a “Risk Alert” that the SEC issued in June 2020 regarding compliance issues for managers of private equity and hedge funds, the Supplemental Statement advised that the 2020 Letter should not be “misread[] . . . as saying that PE – as a component of a designated investment alternative – is generally appropriate for a typical 401(k) plan.”

So how did we get here, and what does this mean?

Many investment options under defined contribution plans include exposure to private equity, and plan fiduciaries often consider adding new asset classes to plan lineups, or to investments within plan lineups, for diversification and potential upside.  For a long time, stakeholders have craved clarity on how ERISA’s fiduciary rules apply to these investments; and challenges to the prudence of alternative investment strategies are actively being litigated.

The 2020 Letter was welcomed by many because the DOL stated affirmatively that an investment option under a defined contribution plan could have an allocation to private equity—albeit “limited,” which the DOL suggested meant not more than 15%.  However, the 2020 Letter also had many caveats, including an statement that it did not address private equity being offered as a standalone investment option (noting that direct investments in private equity present “distinct legal and operational issues”), and highlighting a range of considerations for plan fiduciaries to address, with no safe harbor.  Still, its positive tone generated increased interest from plan fiduciaries and asset managers.

The Supplemental Statement is more cautionary, emphasizing that the DOL “did not endorse or recommend” offering designated investment alternatives with private equity components, and that it wanted “to ensure that plan fiduciaries do not expose plan participants and beneficiaries to unwarranted risks by misreading” the 2020 Letter as saying that these investments are “generally appropriate for a typical 401(k) plan.”

The Supplemental Statement highlights the following key points:

  • The DOL agrees with some stakeholders that representations in the 2020 Letter about the benefits of private equity investments were void of counter-arguments and research data from independent sources outside of the private equity industry.

  • Plan fiduciaries have a responsibility to be prudent in selecting and monitoring any investment alternative. Understanding and evaluating exposure to private equity is part of this responsibility.

  • As explained in the 2020 Letter, prudent evaluation of private equity requires specialized expertise. Fiduciaries considering private equity must have this expertise or seek it from qualified managers or advisers.  The DOL is concerned that a “typical” plan fiduciary might not have the expertise.

Ultimately, the Supplemental Statement does not change the bottom line from the 2020 Letter.  Limited private equity allocations within a defined contribution plan investment are still permitted.  The Supplemental Statement simply highlights the importance of rigorous analysis when evaluating the prudence of an investment, and it stresses the particular complexity of private equity.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 14
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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.

...
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
Senior Counsel

Nicholas LaSpina is a senior counsel in the Tax Department and a member of the employee Benefits & Executive Compensation Group.

212-969-3185
Andrea E. Ewalefo Law Clerk labor employment Proskauer Rose LLP
Law Clerk

Andrea Ewalefo is a law clerk in the Labor Department and a member of the Employee Benefits & Executive Compensation Group.

504-310-2043
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