Private Equity and DC Plans: Points to Consider

The Department of Labor (DOL) has indicated, at least in one case, that it will allow defined contribution plans to offer indirect investment in private equities. A recent blog entry offers food for thought regarding private equity and considerations concerning such investments. 

In “Understanding Private Equity Investments in Defined Contribution Plans,” James Pellino cites the June 3 information letter the DOL sent to Pantheon Ventures (US) L.P. (Pantheon) and Partners Group (USA), Inc. (Partners Group), regarding the DOL’s views on use of private equity investments in designated investment alternatives made available to participants and beneficiaries in individual account plans subject to ERISA. Information letters are not formal guidance and reflect the DOL’s thinking regarding a specific circumstance, and are not broadly applicable nor precedent. Nonetheless, they do offer a look at how the DOL approaches certain issues and situations and may be helpful in providing food for thought, and Pellino uses this letter as food for thought regarding such investments. 

Pellino notes that Pantheon and Partners Group sought guidance regarding whether a DC plan fiduciary would violate ERISA by including a multi-asset class vehicle with a private equity component in its fund lineup. The letter, he writes, covers only fund asset managers’ allocation decisions in scenarios in which private equity would be among the categories of equity investments within the fund—and not fiduciary or other ERISA issues that would be involved in a DC plan allowing individual participants to invest their accounts directly in private equities. 

The letter, Pellino writes, was “clear” that such direct investments “present distinct legal and operational issues for fiduciaries of ERISA-covered individual account plans.” He notes that the DOL suggests factors that plan fiduciaries considering the inclusion of a private equity investment option in multi-asset class funds could consider whether the fund:

• has managers with “the capabilities, experience, and stability” to handle private equity;
• is allocated to private equity investments appropriately;
• has adopted features that give participants the ability to adjust investment allocations in a way consistent with the plan’s terms; and
• is suitable in light of the plan’s participant profile.

“What this boils down to,” writes Pellino, “is that the plan fiduciary must act with due diligence in determining the suitability of private equity investments as part of the plan’s portfolio” and that whether to allow such investments requires “very careful thought.”