DOL issues additional guidance on DC scheme private equity investments – Employment and HR

On December 21, 2021, the Department of Labor (“DOL”) issued a statement regarding the investment in private equity by defined contribution plans covered by ERISA (the “Statement”, available here). The statement is intended to complement the newsletter of 3 June 2020 (“newsletter”, summary available here) which addressed the inclusion of private equity as a component of the Allocation Fund (s) of the active of a plan (for example, a target date fund). The declaration does not modify or cancel the newsletter. However, it emphasizes some of the key fiduciary considerations and attempts to limit the scope of previous guidelines.

I. Context

The DOL published the newsletter last year in response to requests from the agency to provide advice regarding the use of private equity investments in the context of defined contribution plans. DOL ruled that defined contribution plans can invest in private equity, stating that a trustee “may offer an asset allocation fund with a private equity component. In a manner consistent with the requirements of the title I of ERISA “. DOL has also provided an analytical framework for Trustees to use when considering a fund that includes private equity investments.

Now, the Biden Administration DOL has determined that it is necessary to avoid any misreading of the newsletter by providing additional advice. DOL has two reasons for this decision.

DOL’s first rationale for the statement is that the agency heard concerns from (unnamed) stakeholders that reciting the applicants’ representations in the newsletter could be seen as an endorsement of private equity. This justification is curious because the DOL regularly summarizes the facts presented by the applicants and then provides an interpretation of the law. Examples include the guidelines for commodities and financial futures adopted by the Reagan administration in 1982 and 1987; ¹ derivatives adopted by the Clinton administration in 1996;² the passive investment strategies adopted by the Bush administration in 2006;³ and target date funds that include annuity allocations adopted by the Obama administration in 2016.⁴ There is no indication that such a direction was ever considered an “approval” of the particular investment or of the investment strategy discussed.

The second rationale for DOL is the publication of a risk alert by the Office of Inspections and Compliance Reviews of the Securities and Exchange Commission (“SEC”) (available here) shortly after the newsletter has been issued by the DOL. The Risk Alert summarizes some private fund compliance issues and offers advice to fund advisers. However, this too is curious as the newsletter explicitly states that DOL coordinated with the SEC, so presumably DOL was aware of the SEC’s private fund implementation efforts, including the conclusion of the Risk alert regarding the effectiveness of SEC enforcement efforts and changes in the industry. .

II. The statement

The statement begins by reiterating the DOL’s view expressed in the newsletter that “a plan trustee would not violate the fiduciary’s obligations under Articles 403 and 404 of ERISA solely by reason of the offer of a professionally managed asset allocation fund with a private equity component as a designated alternative investment fund subject to the important conditions set out in the newsletter. ”However, the Declaration provides two details.

First, the statement clarifies that the representations contained in the letter do not reflect the views of all stakeholders and were “not balanced by counter-arguments and research data from independent sources”. However, unlike the newsletter, there is no data cited in the statement to substantiate this concern, and indeed, the liberal Urban Institute think tank recently released a study further documenting the benefits of the inclusion of private equity as an asset class in professionally managed accounts. (available here). The DOL then expresses stakeholder concerns regarding information on the performance of private equity funds, the lack of liquidity and the challenge participants may have in understanding investing. Notably, all of these issues were addressed in the newsletter.

Second, the statement clarifies the DOL’s view that the newsletter was intended to provide guidance to trustees of large plans who already have experience with private equity because they operate benefit plans. defined. The DOL states that only a minority of trustees of small plans are able to assess the use of risk capital. However, the agency does not explain why it is appropriate to use plan size as an indicator of fiduciary sophistication or why a small plan trustee could not rely on a sophisticated mutual fund company, a professional investment manager or advisor to build a portfolio that prudently allocates funds to private equity.

III. Observations

The views expressed in the Declaration are, from a legal point of view, largely consistent with the Newsletter. The Statement reiterates some of the key questions that trustees should consider when evaluating an investment that includes a private equity component, and stresses the need for plan trustees to understand the investments they are making. are considering. In our experience, the newsletter was not seen as an endorsement of the practice of using private equity in defined contribution plans. Likewise, it is not clear that the Declaration will be viewed as discouraging (or encouraging) practice, provided that a Trustee follows an appropriate process in making such a decision. Although DOL is clearly attempting to restrict the application of the newsletter, there is no reason to believe that a Trustee would violate its obligations under ERISA by operating in all corners of the newsletter. information, regardless of the size of the plan.

Footnotes

1 DOL newsletter to Donna J. Hollis (November 24, 1987); Advisory Opinion DOL 82-49 (September 21, 1982).

2 DOL newsletter to Eugene Ludwig (March 21, 1996).

3 Advisory opinion of DOL 2006-08 (October 3, 2006).

4 DOL newsletter to Christopher Spence (December 22, 2016).