More than two dozen organizations and individuals wrote to the Department of Labor urging the department to rethink its approach to funds with private equity exposure on retirement plan menus. Last June, DOL issued an information letter setting forth key factors plan fiduciaries would have to consider to meet their fiduciary duty under ERISA when deciding whether to include, as a designated investment alternative within a defined contribution retirement plan, a multi-class asset allocation fund that includes a private equity component.
The groups lay out three concerns with the DOL information letter: 1) It fails to give adequate consideration to the capacity of the typical plan sponsor, offering a defined contribution plan to its workers, to conduct the required analysis. 2) It fails to present a balanced presentation of the potential risks and rewards of investing in private funds. 3) It contemplates permitting funds with a private equity component in certain types of investments – including collective investment trusts (“CITs”) and target date funds – without adequately weighing the particular risks they could pose to defined contribution plan participants.
The groups urge DOL to withdraw the June 2020 information letter, or at least suspend its implementation, while it takes the following three actions:
- Revise the information letter to incorporate a more complete and balanced analysis of the potential risks and rewards of private investments in order to support more informed decision-making by defined contribution plan fiduciaries with regard to the appropriateness of these investments for their employees.
- Include a warning to plan fiduciaries that, where they lack the financial knowledge and sophistication to assess the appropriateness of the investments and provide the necessary oversight, they must either get disinterested advice from a fiduciary who has the requisite expertise or refrain from including the investments on the plan menu.
- Study developments since the information letter was released to determine the extent to which funds with private equity exposure have been, or are anticipated to be, added to plan menus, what process is being used in their selection, whether those funds are being designated as QDIAs, and how any CITs with private equity exposure are structured.
“We believe these steps are necessary to help ensure that defined contribution plan fiduciaries base any decisions about whether to add funds with private equity exposure to plan menus on a balanced consideration of the benefits and risks. It would also help arm the Department with the information it needs to ensure that retirement plan participants are not being put at undue risk,” the letter concludes.