Bloomberg Law
June 4, 2020, 7:54 PM

Private Equity Options for 401(k)s Bring Litigation Uncertainty

Lydia Wheeler
Lydia Wheeler

New guidance from the Trump administration has reassured those managing 401(k)s that private equity investments are acceptable options for plans, but attorneys warn it won’t shield against litigation by participants unhappy with their returns.

In a guidance letter Wednesday, the Department of Labor’s Employee Benefits Security Administration said a fiduciary of an individual account can offer an asset allocation fund with a private equity component so long as they evaluate the risks and benefits involved and follow their duties under the Employee Retirement Income Security Act to act prudently. But ERISA attorneys say the letter doesn’t bless particular formulations of private equity or create a policy under which there is any safe harbor that would insulate fiduciaries from liability.

“It’s impossible for the department to dig into the details of what the mechanics of a particular private equity fund are going to look like and where litigation tends to arise right now is as to the details of the individual funds,” said Brian Netter, a partner at Mayer Brown who represents fiduciaries and plan sponsors.

Newfound Comfort

But some attorneys say the letter makes litigation over the appropriateness of investments or resulting plan losses harder to win.

“This is definitely helpful from a liability standpoint in litigation. There is no doubt about it,” said Jon Breyfogle, principal at Groom Law Group. “The department’s guidance is respected in the courts, it can get deference in litigation and I think where fiduciaries follow the guidance, look at the factors that the department set out and they document how they look at it, it will be helpful.”

Breyfogle represented Pantheon Ventures L.P. and Partners Group Inc.—two private equity firms—in requesting the guidance from DOL, which he said is unusual to get.

“You can’t stop frivolous litigation from happening and there’s obviously been hundreds of fee cases filed and there is an active plaintiff’s bar, but I think this will provide comfort that this can be done in a way that meets ERISA’s requirements,” he said.

Growing Interest

Over the past two decades, 401(k) plan sponsors have seen a rise in litigation that centers on the types of investments selected by plan fiduciaries. Most often, the litigation challenges investments that charge high fees or those where the investment returns are questionable. The issue of private equity investments in 401(k) plans has been rarely litigated; a recent lawsuit involved a plan sponsored by Intel Corp.

Christopher Sulyma sued Intel in 2015 alleging the company over-allocated retirement assets in risky and high-cost hedge fund and private equity investments. The lawsuit was stalled by a dispute over whether Sulyma had filed his case too late under ERISA, but the U.S. Supreme Court ultimately ruled in his favor and allowed his claims to proceed.

Sulyma’s case has now been combined with a similar lawsuit against Intel filed in August, and a consolidated complaint will be filed, said Gregory Porter, a partner at Bailey & Glasser LLP and one of Sulyma’s attorneys.

Attorneys say interest in adding private equity investments to 401(k) plans has been growing among companies, but the Intel case made some firms skittish about trying this strategy.

The Intel lawsuit didn’t eliminate the substantive interest in private equity investments, but people were worried about getting sued, said Josh Lichtenstein, a partner in the ERISA group at Ropes & Gray LLP.

“Now what this letter really does more than anything is it sort of provides a reassurance to plan sponsors that, ‘Yes you can make these types of decisions consistent with your fiduciary duties as long as you have the right considerations and process,’” he said.

Protection Questioned

But as an attorney representing employees in ERISA class actions, Porter doesn’t know how much protection the guidance will really provide fiduciaries.

“I’m not sure how valid the guidance is in the sense that it’s just a letter and it’s just telling people essentially that if you do all your due diligence and you think it’s a really good idea then maybe it’s OK,” he said.

“But that’s not a whole lot of comfort for fiduciaries I don’t think. I think it’s basically just a signal that the Department of Labor as currently constituted under the Trump administration isn’t going to come after you if you do this,” Porter said.

To contact the reporter on this story: Lydia Wheeler in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at; Fawn Johnson at