US Department of Labor Allows Private Equity Investments in 401Ks, the SEC Applauds Move


Yesterday, the U.S. Department of Labor (DLO) issued an Information Letter under the Employee Retirement Income Security Act (ERISA) pertaining to private equity investments as a component of a professionally managed funds offered as an investment option for participants in defined contribution plans. Effectively, certain funds that invest in private equity may be made available for retirement savings like a 401K.

The move by the DOL was predicted on the Regulatory Relief to Support Economic Recovery Executive Order 13924. President Trump 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.”

U.S. Secretary of Labor Eugene Scalia commented on the letter:

“This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns. The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”

Jay Clayton, Chairman of the Securities and Exchange Commission, commended the move by the DOL. This 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,” said Clayton.

The SEC has been deliberating on providing more access to private equity investments to a broader segment of the population. In the past, only accredited investors and certain private funds, such as VCs, have been able to access equity investments in private firms. Meanwhile, private markets have boomed while public markets have stalled.

As the cost to become a public company has risen dramatically, along with the ongoing compliance demands, most promising young firms strive to remain private as long as possible as it makes clear economic sense. Frequently, firms that are experiencing significant growth and success will share that wealth creation with early investors, thus cutting out the majority of the population.

The DOL said that private equity investments have long been part of the investment portfolios used by defined benefit plans to fund retirement benefits for many US workers, but they generally have not been incorporated into investment funds used by defined contribution plans, such as 401k plans.

The Information Letter addresses private equity investments offered as part of a professionally managed multi-asset class vehicle structured as a target date, target-risk, or balanced fund. Adding private equity investments to such professionally managed investment funds would increase the range of investment opportunities available to 401(k)-type plan options.

The DOL noted that the Information Letter does not authorize making private equity investments available for direct investment on a standalone basis.


DOL Letter Private Equity Investments 06-03-2020


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