PLANADVISER - July/August 2020 - 38

ERISA vista
Fred Reish and Joan Neri
DOL Gives Private-Equity Guidance
401(k) plans may include the strategy as part of a diversified fund
ADVISER QUESTION: I'm a fiduciary adviser
Income Security Act] plans.
[Employee Retirement
to ERISA
I heard
that the DOL [Department of Labor] just provided guidance
on private equity investments in 401(k) plans. What did it say?
ANSWER: The DOL's recent information letter providing
guidance on this topic describes the evaluation process for
determining whether an investment fund having a private
equity component is prudent under ERISA fiduciary standards.
Here are the key takeaways.
Characteristics of the Investment
The type of investment being discussed was a professionally
managed asset-allocation fund, structured as a custom
target-date fund (TDF), target-risk fund or balanced fund.
Included would be a pooled investment vehicle such as a
collective trust fund or separately managed account. We'll
refer to it here as simply " the fund. " The fund's overall exposure
to private equity investments was limited to a target
allocation, with the remainder of its portfolio invested in
publicly traded securities or other liquid investments with
readily ascertainable market values.
Evaluating the Prudence of the Investment
The DOL observed that a fiduciary has a duty to evaluate
such funds as it would any other designated investment
alternative by engaging in an objective, thorough and
analytical process that considers all relevant facts and
circumstances. Further, the DOL pointed out that certain
factors unique to investments of this type should be considered,
including the following:
Diversification. Does the fund offer plan participants the
opportunity of more diversification over a multi-year period
within an appropriate range of expected returns net of fees?
Oversight. Is the fund managed by an experienced
investment professional, or overseen by the plan fiduciary,
using a third party investment expert as needed?
Liquidity. Is the fund's allocation to private equity
limited so as to insure that the fund provides liquidity for
participants and permits direct exchanges as between it and
other investments of the plan's lineup? By way of example,
the DOL indicated that these funds could limit their private
equity investment to 15%-in a manner similar to the 15%
limitation imposed by the Securities and Exchange Commission
(SEC) on illiquid assets of a registered open-end fund.
The DOL pointed out that the liquidity and valuation of funds
with an equity component need to be appropriate given
the practice of allowing 401(k) plan participants to change
investment selections on a frequent-often daily-basis.
Valuation. Does the fund appropriately value the private
equity investment-for example, according to independent
valuation procedures such as the Financial Accounting
Standards Board Accounting Standards Codification (ASC)?
Adequacy of fund information. Will adequate information
regarding the fund's character and risks be provided
to participants to help them make an informed assessment
as to whether to invest their plan account in the fund? The
DOL observed that, for those fiduciaries claiming limited
fiduciary liability under the ERISA 404(c) safe harbor rule,
the adequacy of such fund information is especially important
in order to establish that participants had investment
control over their plan accounts.
Alignment with the plan's characteristics. Evaluating
the fund similarly to the way you evaluate target-date funds,
do you find it aligns with the characteristics and needs of
the participants? This means that the evaluation process
should include consideration of the fund's investment allocation
and strategy, fees and other expenses, the nature
and duration of any liquidity restrictions, the participant's
ability to access money in his account for a loan or distribution
and the ability to change investment selections on a
frequent basis.
Advisers should consider the DOL guidance when
advising 401(k) plan clients that are considering offering
managed asset-allocation funds with a private equity
component. For such clients, an adviser could assist them in
developing an investment policy statement (IPS) that reflects
the factors set forth above, including restrictions on the
percentage of private equity investment that their fund may
hold. In advising such clients, advisers should also consider
that the scope of the DOL guidance is limited. For instance, it
does not address the selection of private equity investments
offered directly as investment options to participants.
Fred Reish is chairman of the financial services ERISA [Employee
Retirement Income Security Act] practice at law firm Faegre Drinker
Biddle & Reath LLP. A nationally recognized expert in employee benefits
law, Fred has written four books and many articles on ERISA, pension
plan disputes, and audits by the IRS and Department of Labor. Joan
Neri is counsel in the firm's financial services ERISA practice, where
she focuses on all aspects of ERISA compliance affecting registered
investment advisers and other plan service providers.
38 | planadviser.com July-August 2020
Art by Tim Bower
http://www.planadviser.com
PLANADVISER - July/August 2020

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