Bloomberg Law
June 15, 2020, 9:36 AM

Private Equity Isn’t for Every Retirement Plan, Advisers Say

Warren Rojas
Warren Rojas
Senior Reporter

Investing in private equity is best left to larger corporate retirement plans that have the bandwidth and resources to properly monitor the complex assets, benefits professionals said.

Larger plans can comb through financial records and debrief participants about the risks and rewards, and therefore could be more likely to capitalize on the administration’s decision to put private equity offerings on the menu for 401(k) holders.

But smaller plans that outsource benefits decisions to third-party administrators or financial consultants should think hard before introducing more uncertainty, attorneys and advisers say.

“There are many individual private investments that are likely inappropriate for the average 401(k) program,” Wylie Tollette, executive vice president and head of client investment solutions at Franklin Templeton, said. “In fact, the ‘average’ private investment might be inappropriate, given costs and illiquidity.”

Crunching Numbers

The Employee Benefits Security Administration signed off June 3 on putting private equity into the investment mix so long as it’s part of a professionally managed, well diversified fund. Two private equity firms, Pantheon Ventures LLP and Partners Group, jointly requested the guidance in 2018.

Tollette praised the move as a step toward the “democratization” of alternative investments that are less familiar to 401(k) participants than share prices of publicly traded companies. But he acknowledged it isn’t an asset for everyone.

There’s a certain comfort level in allowing traditional pension plans to invest in private equity because litigation-wary employers have “every incentive to be careful” in the selection process, Phyllis Borzi, former head of EBSA during the Obama administration, said.

Asking individual employees in 401(k) plans to bet their retirement security on leveraged buyouts they know nothing about is more daunting, she said.

“Because the participant bears the investment risk in a 401(k) plan, some experts are skeptical that the same level of care will be applied in the selection and monitoring of a private equity investment,” Borzi said.

Private equity could be a good fit for companies with “a very sophisticated plan committee” and “very sophisticated workforce,” Greta Cowart, an employee benefits attorney and partner at Jackson Walker LLP in Dallas, said.

Picking Winners

Companies looking to engage in private equity will need to be able to clearly explain to their participants why and how those assets are worthwhile investments, attorneys say.

Tollette said EBSA “was careful not to call out specific categories as acceptable investments versus other categories of private equity that are not allowed.” Those decisions remain the responsibility of retirement plan fiduciaries.

“There are generally no ‘approved lists’ and ‘restricted lists’ in the ERISA world, as Congress and the Department of Labor have thankfully not substituted their judgment for the judgment of the responsible fiduciaries,” according to Andrew Oringer, a partner and co-chair of Dechert LLP’s ERISA and executive compensation group.

Oringer said EBSA’s information letter, which permitted 401(k) plans to invest in private equity, is “admittedly helpful from a compliance perspective,” but stressed that it doesn’t resolve underlying problems such as limited information about the businesses private equity firms buy and sell daily, as well as how much those speculative deals are worth.

“The letter does absolutely nothing to navigate those waters,” Oringer said. “And the long-existing challenges are still there, unchanged.”

Cowart said plan sponsors unsure about venturing into the private equity market should be asking themselves “who’s going to be able to buy this?” if things go south.

“Is it going to be the equivalent of a timeshare?” she said.

To contact the reporter on this story: Warren Rojas in Washington at

To contact the editors responsible for this story: Fawn Johnson at; Alexis Kramer at