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The Department of Labor (DOL) recently rescinded a supplement statement issued in December 2021 that said most plan fiduciaries were “not likely suited to evaluate the use of [private equity] investments” in individual account plans such as 401(k) accounts.
This rescission was made in response to an Aug. 7 executive order seeking guidance for more employers to offer “alternative assets,” such as private equity and cryptocurrencies, as an investment option in 401(k) accounts. With the executive order, President Donald Trump’s administration is resuming efforts to increase the presence of such investments in workers’ retirement accounts, which started during his first term.
Pivoting back to PE. In June 2020, the DOL issued an information letter in response to a query from a law firm representing Pantheon Ventures and Partners Group, which have both advocated for offering private equity as an investment option in 401(k) accounts.
An official with the DOL wrote that offering private equity as a “designated investment alternative” in a retirement plan would not necessarily violate the Employee Retirement Income Security Act (ERISA), which requires fiduciaries to act in the best interests of their plan participants, as well as select investments that are prudent.
After President Joe Biden took office, though, the DOL expressed concern in a supplemental statement that the 2020 letter might prompt plan fiduciaries to misread “the letter as saying that PE [private equity]—as a component of a designated investment alternative—is generally appropriate for a typical 401(k) plan.” The statement further expressed concern about most plan fiduciaries’ ability to evaluate private equity investments in this context.
The DOL rescinded this statement on Aug. 12. In a press release, Deputy Secretary Keith Sonderling said Americans’ ability to save for retirement had been hampered by “unnecessary government overreach,” and suggested repealing this guidance could help build “a future where innovative retirement products can deliver increased upside, diversification, and security to the American worker.”
What Trump’s push for alternatives could mean for workers. Just 2.4% of retirement plans include private equity as an investment option, but the private equity industry is lobbying to change that.
Part of employers’ hesitation around incorporating private equity into their 401(k) plans stems from the fact that such investments tend to be more volatile than public stocks, and have higher fees associated with them. Such fees have gotten some employers into hot water—Intel, for example, was sued in 2015 by employees who alleged the company violated its fiduciary duties by including alternative assets, including private equity, in its retirement plans. The case was dismissed by a federal court in California, though, and that dismissal was recently affirmed by the 9th Circuit Court of Appeals.
The Aug. 7 executive order issued by the Trump administration seeks to reduce “regulatory burdens and litigation risk” associated with these investments, so HR leaders may expect to see additional actions to that end in the near future. The order calls on the DOL to develop guidance regarding a fiduciary’s duties under ERISA when it comes to making alternative assets available to retirement plan participants, as well as clarify its position on alternative assets, within 180 days.
Even though the Trump administration has voiced its support for employers that want to offer assets like cryptocurrency or private equity in 401(k) plans, making such options available would still require companies to undergo a robust fiduciary process, HR Brew previously reported.