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Private Equity Investing Now Allowed in 401(k) Retirement Funds

June 3, 2020, 4:52 PM

Employees seeking to enhance their 401(k) retirement savings can now invest in private equity firms via professionally managed funds, the Trump administration said.

The Employee Benefits Security Administration said Wednesday in an information letter that sponsors of defined contribution plans can incorporate private equity into diversified investments, such as target date funds that automatically adjust holdings to maximize returns and minimize risk based on a projected retirement date.

Private equity was previously off the menu in most cases because of uncertainty regarding fiduciary responsibilities by plan sponsors and liability surrounding the investments held by private companies.

The change makes it so private equity activity contained within a broader fund complies with the investing standards governing publicly traded companies, EBSA said in the letter to D.C.-based Groom Law Group.

“This letter should assure defined contribution plan fiduciaries that private equity may be part of a prudent investment mix and a way to enhance retirement savings and investment security for American workers,” EBSA acting director Jeanne Klinefelter Wilson said in a statement.

The expansion applies to private equity investments offered “as part of a professionally managed multi-asset class vehicle,” EBSA said. The agency drew the line at pumping money directly into private equity, stressing that the informal guidance “does not authorize making private equity investments available for direct investment on a standalone basis.”

Groom attorney Jon Breyfogle, who originally inquired about making the change, hailed the news.

“For decades, institutional investors like traditional pension plans and endowments have invested in private equity, but 401(k) plan fiduciaries have been reluctant to add the asset class to their plans in the absence of specific guidance from DOL,” he said in a press release. Now, fiduciaries have “more legal certainty if they want to consider additional asset classes as part of a diversified 401(k) investment option.”

To contact the reporter on this story: Warren Rojas in Washington at wrojas@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Alexis Kramer at akramer@bloomberglaw.com

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