This comes in the wake of employee lawsuits against companies such as Intel and Verizon that included alternative investments in TDFs. U.S. Secretary of Labor Eugene Scalia says, “This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns.”, Robert R. Johnson, PhD, CFA, CAIA, professor of finance at Creighton University, says it's a mistake to give 401(k) investors access to private equity through their plans. Still, research conducted by Georgetown University’s McCourt School of Public Policy’s Center for Retirement Initiatives in conjunction with Willis "Information Letter, June 3, 2020." Retirement savers in 401(k) plans could soon gain exposure to private-equity strategies, a move that pits proponents of the investment option against critics who say it would introduce unsuitable risks for many investors. The DOL letter points to additional considerations that would be a factor in deciding whether a fund had protection under this guidance: When it comes to evaluating the new DOL guidance, opinion is mixed. This wasn’t a change in the rules.”. We've detected you are on Internet Explorer. There is career risk.”. This will completely disrupt the PE [private equity] markets. “When the stock market goes down, it goes down,” he says. Custom target-date funds, such as the one at the heart of the Intel lawsuit, are generally used within very large DC plans, or those with billions of dollars in assets. And DC plan sponsors, ever leery of being sued, are not keen to be the first penguin to jump off the iceberg. This copy is for your personal, non-commercial use only. The private equity market has long had its eyes on access to the trillions of dollars in the 401k plan Private Equity Market Won’t See Boost from 401k Plans for Years: Report - 401K Specialist PitchBook report says recent DOL ruling allowing private equity investment in 401k plans won’t lead to the tidal wave of cash some had been anticipating. While such investments are often touted as uncorrelated because they’re not priced in the public market, they’re still equity, says John Rekenthaler, vice president for research for Morningstar. These include white papers, government data, original reporting, and interviews with industry experts. The letter doesn’t authorize making private-equity investments available for direct investment in defined-contribution plans, such as 401 (k)s. … The Labor Department earlier this month issued an information letter that opens the door for average retirement savers to invest in strategies that are typically the domain of high-net-worth investors. Only about 1% of large plans surveyed by the Defined Contribution Institutional Investment Association said their custom target-date options include private equity, according to a report from the organization in May. If the investments are incorporated as planned into target-date and target-risk funds—the default investment option for many 401(k) participants—they’ll land in the portfolios of the least engaged investors. Depriving 401(k) participants of the asset class just because the execution is going to be complicated and difficult is not wise, he says. "Private equity structures are complex and opaque to the average investor," says Johnson, noting that "the asset class embeds large fees in the structures and the returns differ widely by firm and vintage. But seldom is a plan participant going to call you up and thank you,” he said. Owens also notes an onslaught of lawsuits against 401(k) plan sponsors for breach of fiduciary duty. With cautions in place and prudent analysis by the fiduciary, the DOL says, investors now have additional opportunities for diversification and enhanced returns.. “To me this wasn’t any sort of a game changer. Adding "private equity investments offered as part of a professionally managed multi-asset class vehicle structured as a target date, target risk or balanced fund...would increase the range of investment opportunities avaialbe to 401(k)-type plan options," the letter states., Kathleen Owens, fiduciary-financial advisor at Aurora Financial Planning & Investment Management LLC in San Francisco, is concerned that the average 401(k) participant will not understand the increased risk of investing in private equity. Opponents think alternative investments are too risky and fee intensive. Proponents believe the new guidance will result in diversification and higher returns for small investors. Barron’s brings retirement planning and advice to you in a weekly wrap-up of our articles about preparing for life after work. “They want to get [a plan], do what’s right by their employees, but they don’t want to stick their necks out. You can learn more about the standards we follow in producing accurate, unbiased content in our. Research what is included in the fund and watch especially for additional fees and potential risks. Accessed Jun 4, 2020. “The prevalence of private equity in custom target-date funds is quite low,” said Christopher Nikolich, an author of the report and U.S. head of glide path strategies for multi-asset solutions at AllianceBernstein. David O’Meara, a senior defined-contribution strategist at Willis Towers Watson, says that shows how incorporating alternative investments, including private equity, into a diversified portfolio may improve retirement income and reduce short-term downside risks. Department of Labor (DOL) guidance in the form of an Information Letter issued June 3, 2020, stipulates that companies with 401(k) plans can now safely offer certain private equity funds to their employees. , The main purpose of the guidance is to assure companies that offer certain types of target-date funds (TDFs) and other investments that include private equity, that they have legal protection. she says. In order to include investments with a private-equity component, fiduciaries simply need to follow a prudent process and document it, he noted. In other words, a target 2025 fund would likely have less exposure to risky private-equity investments than a target 2050 fund.