The Labor Department gave the green light for defined contribution plan sponsors to incorporate certain private equity strategies into their investment options, such as target-date, target-risk or balanced funds, so long as a prudent fiduciary process is undertaken.
It's important for plan sponsors to at least look into the feasibility of incorporating private equity into DC plans — whether they ultimately add an allocation or not.
Some in the retirement world have long argued for the inclusion of alternative investments such as private equity, noting that these investments are quite common in defined benefit plans. The Department of Labor said earlier this month that its guidance is intended to level the playing field, to help John and Jane Main Street better save for a secure retirement. As the number of public companies continues to decrease, expanding the potential investment universe should be a victory for DC participants.
To date, litigation risk as well as concerns about the need for daily valuations and liquidity have proven to be big stumbling blocks to the adoption of alternatives in defined contribution plans. The litigation risk has been lessened with the DOL guidance.
But most industry observers aren't expecting that DC plan sponsors will race to offer these investment choices, even with the DOL's guidance — nor should they. Concerns abound about the private equity fees and whether returns even come close to justifying those fees. For those reasons alone, a plan sponsor could reasonably decide against adding private equity to a target-date fund.
But not adding private equity to an investment offering won't get plan sponsors completely off the hook. As with any investment decision, sponsors must have a sound process in place to guide their decisions, and carefully document those deliberations. In other words, follow a prudent fiduciary process no matter where you end up on adding alternatives.