Earlier this month, the Department of Labor penned a public letter in response to an inquiry from two private equity firms. The asset managers, Pantheon Ventures and Partners Group, wanted to know what the department thought about the inclusion of private equity investments in the retirement accounts of Americans.
Pantheon Ventures and Partners Group both offer multi-asset class vehicles structured as target date, target risk, or balanced funds. But the uptake of private equity investments by defined contribution plans has been meager.
The DOL’s response was straightforward: “The Department believes that a plan fiduciary of an individual account plan may offer an asset allocation fund with a private equity component of the type you describe in a manner consistent with the requirements of Title I of [the Employee Retirement Income Security Act of 1974].”
In other words, if advisors to defined contribution plans believe private equity investments are appropriate for those investors and their 401(k) retirement accounts, the plan can offer them — there is nothing inherently bad or wrong with private equity as an asset class, according to the letter.
Some observers begged to differ and took the department’s guidance as a victory for lobbyists under a Wall Street-friendly President Donald Trump. An article by a Forbes contributor said the letter “opened the door for private equity wolves to sell the highest cost, highest risk, most secretive investments ever devised by Wall Street to 401k plan sponsors.”
But attorneys and consultants of retirement plans don’t see a meaningful uptake of private equity happening anytime soon.
The department’s letter makes it clear it believes advisors can include private equity investments in retirement plans and fulfill their fiduciary duty, but the blessing is simply a message. “This is an informational letter. It's not new regulation,” Josh Cohen, the head of Institutional Defined Contribution at PGIM, told RIA Intel.
The letter does not authorize direct private equity investments on a standalone basis, which is limited by law to only the wealthiest private investors and institutions.
And while the guidance itself is significant because it could help convince plan sponsors, fearful of litigation, to offer private equity in some form, employers and their consultants won’t be suddenly rushing to the investments, according to Fred Reish, a partner in Faegre Drinker’s Benefits & Executive Compensation practice group.
For years, private equity has been searching for ways to work with retirement plans, where billions of untapped dollars could be allocated to the asset class. But plan sponsors tend to be conservative and are slow to embrace innovation and cutting-edge practices, Reish said. Meanwhile, target date funds, which are better catering to investors and improving adoption rates, continue to attract more 401(k) assets. If private equity wants to make any meaningful push into retirement plans in the near future, it has to be a part of that trend, he added.
Others agreed with Reish.
“I certainly think it’s an interesting development. I don’t necessarily know if it’s going to be a big deal for DC plans,” said Jennifer Doss, the director and Defined Contribution practice leader at Captrust, the Raleigh, N.C.-based advisor to over $390 billion belonging to corporate retirement and individuals.
Conversations are happening about what the next big change will be for retirement plans, according to Doss. She wonders if private equity is not just a topic du jour but something that will catch on and eventually be adopted broadly. Clearly Pantheon Ventures and Partners Group understand that target date funds are the likely means to that potential end, she said.
“There are a lot of areas of improvement where I think DC plans, target date funds and such, can do better in order to provide much more diversifying asset classes to participants and give them access to the types of investments only institutional investors and high-net-worth investors have access to,” Cohen said.
The largest multi-billion dollar retirement plans, that have scale, sophistication, and the right consultants, can build custom target date funds for the employees. But all the other plans rely on a short list of huge fund providers, such as Fidelity Investments or Vanguard. Convincing companies to abandon those firms for a smaller target date fund provider, exclusively for the benefit of including private equity in target date funds, would be a hard sell, Cohen said.
Musings amongst people like Doss also go as far to wonder about a world where target date funds no longer dominate, perhaps in favor of separately managed accounts or other vehicles, she said. Investors are increasingly interested in portfolios customized to their individual wants and needs and asset managers will go to lengths to provide that if it means winning their business.