The Labor Department published an information letter June 3 in response to a Groom Law Group LLP request on behalf of its clients Pantheon Ventures (U.S.) LP and Partners Group, which have developed private equity strategies that can accommodate DC plans. The letter made clear that DC sponsors can implement certain private equity strategies into diversified investment options, such as target-date, target-risk or balanced funds, while complying with the Employee Retirement Income Security Act.
It also outlined the steps a fiduciary must take when evaluating the risks and benefits associated with the investment alternative. In order to comply with ERISA, the Labor Department said a fiduciary should consider whether the allocation would offer plan participants the opportunity to invest their accounts among more diversified investment options within an appropriate range of expected returns net of fees; how the allocation fund is managed; and whether the allocation fund has limited the allocation of investments to private equity in a way that addresses potential cost, complexity, disclosures and liquidity issues.
Jonathan Epstein, New Orleans-based president of the Defined Contribution Alternatives Association who has spoken with Labor Department officials about the merits of these assets, applauded the guidance and said it is "helping plan fiduciaries give participants access to investment products that had previously been limited to institutional investors."
While private equity investments have long been incorporated in defined benefit plans, DC plan sponsors have mainly steered clear of incorporating alternative assets in their plans due to litigation concerns and structural issues such as liquidity and valuation needs.
Pantheon and Partners Group say they solved for the latter concern with private equity investment products containing a liquidity component to manage participant-directed deposits and withdrawals.
Pantheon, which established a collective investment trust in 2013 that's intended to be incorporated within a target-date fund, has pension fund assets within it, but not DC plan assets at this point, a spokeswoman said, though declining to provide specifics.
Partners Group started its own CIT in 2015, which currently has no DC assets but does have two defined benefit plans — one public, one corporate — using the product, Mr. Collins said, though he declined to provide specifics.
Allocations to diversifiers, which include alternative assets, currently make up a small percentage in custom target-date funds — 0.7% on average in both target years 2020 and 2060 funds, according to research from the Defined Contribution Institutional Investment Association published in May.