DOL Outlines Considerations in Using Private Equity as a Designated Investment Alternative

In a recent information letter, the Department of Labor (DOL) has outlined considerations regarding the use of private equity investments in designated investment alternatives made available to participants and beneficiaries in individual account plans subject to ERISA.

The letter was sent in response to an inquiry send to it on behalf of Pantheon Ventures (US) L.P. (Pantheon) and Partners Group (USA), Inc. (Partners Group), regarding the DOL’s views on such use of private equity investments. Specifically, it concerns the use of private equity investments within professionally managed asset allocation funds that are designated investment alternatives for participant-directed individual account plans. The letter indicated that Pantheon and Partners Group have developed private equity investments designed to be used as a component of a managed asset allocation fund in an individual account plan, and that both investments are offered as collective investment trusts that invest in private equity and have a liquidity component to manage the participant directed deposits and withdrawals from the fund.

 

The DOL notes in the letter that whether a particular fund or investment alternative satisfies the requirements set forth in Sections 403 and 404 of ERISA “is an inherently factual question upon which the Department will not issue opinions; however, it is appropriate to respond to the inquiry in an information letter

 

The DOL notes that ERISA Sections 403 and 404 establish comprehensive standards to govern fiduciary conduct, and that regarding employee benefit plans, fiduciaries “must discharge their duties with respect to a plan solely in the interest of the plan’s participants and beneficiaries, and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

 

Of particular relevance in this case, says the DOL, is that under Title I of ERISA, plan fiduciaries must: (1) prudently select and monitor any designated investment alternative under the plan and liability for losses resulting from a failure to satisfy those duties, and (2) engage in an objective, thorough and analytical process that considers all relevant facts and circumstances and then act accordingly when evaluating a particular investment alternative for consideration as a designated investment alternative.

 

The DOL says that it “believes that a plan fiduciary of an individual account plan may offer an asset allocation fund with a private equity component” of the type described in the letter in a manner consistent with Title I of ERISA. “However,” they write, “there are important differences between a fiduciary’s decision to include private equity investments in the portfolio of a professionally managed defined benefit plan, and the decision to include an asset allocation fund with a private equity component as part of the investment lineup for a participant-directed individual account plan.”

 

In evaluating whether to include a particular investment vehicle with an allocation of private equity as a designated investment alternative, the letter says that “the responsible plan fiduciary must evaluate the risks and benefits associated with the investment alternative” and that in doing so should consider:

 

The DOL also writes that is important that a fiduciary consider:

 

The DOL says that a plan fiduciary would not violate its duties under Sections 403 and 404 of ERISA just because it offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the way the inquiry outlines.

 

But the DOL also cautions that private equity investments “present additional considerations to participant-directed individual account plans that are different than those involved in defined benefit plans.” It goes on to say that “In making such a selection for an individual account plan, the fiduciary must engage in an objective, thorough and analytical process that compares the asset allocation fund with appropriate alternative funds that do not include a private equity component, anticipated opportunities for investment diversification and enhanced investment returns, as well as the complexities associated with the private equity component.”

 

 

Information letters are not formal guidance. They reflect the DOL’s thinking regarding a specific circumstance on which their interpretation is requested. They therefore are not broadly applicable nor precedent; however, they do offer a look at how the DOL approaches certain issues and situations and may be helpful in providing food for thought.