Investor advocates warn
high-risk, high-fee investments could harm savers
The Department of Labor on
Wednesday assured retirement plan providers that they can include private
securities in funds that they offer to their individual account participants.
In an information letter
responding to a question from Pantheon Ventures and Partners Group, the DOL
said plan sponsors can incorporate private equity investments in a multi-asset
target-date, target-risk or balanced fund.
A plan administrator would not
violate the fiduciary requirements of federal retirement law “solely because
the fiduciary offers a professionally managed asset allocation fund with a
private equity component,” the letter said.
The DOL said that encouraging the
prudent use of private equity would help boost retirement account
diversification and performance in defined-contribution plans. Defined-benefit
retirement plans already can utilize private equity.
“This information letter will
help Americans saving for retirement gain access to alternative investments
that often provide strong returns,” Labor Secretary Eugene Scalia said in a
statement. “The letter helps level the playing field for ordinary investors and
is another step by the department to ensure that ordinary people investing for
retirement have the opportunities they need for a secure retirement.”
Allowing ordinary retirement
investors to access private securities markets has been a priority for
Securities and Exchange Commission Chairman Jay Clayton, who endorsed the DOL’s
move with a statement contained in the DOL’s press release.
Anya Coverman, senior vice
president and general counsel at the Institute for Portfolio Alternatives,
welcomed the DOL’s guidance.
“It’s a big step toward giving
plan participants access to the same range of investment tools and portfolio
diversification that has traditionally been used successfully by
defined-benefit plans,” Coverman said.
Investor advocates blanched at
the DOL’s effort to ease private equity into retirement accounts, citing the
opaque nature of unregistered securities.
“The last thing the DOL and the
SEC should be doing is directing more investment money from transparent public
markets to high-risk dark private markets,” said Dennis Kelleher, chief executive
of Better Markets.
One of the criticisms of private
equity funds is their high fees. The California state pension system, for
example, disclosed several years ago that it paid 700 basis points in private
The DOL should have been more
cautious about opening the door to private equity, said Tyler Gellasch,
executive director of Healthy Markets Association.
“The pension and retirement
community’s track record with private equity has been mixed at best,” Gellasch
said. “The fees and risks associated with investments in private funds compared
to public funds may be very significant. It’s frankly the exact opposite
direction I would hope the DOL would be taking to protect the retirement funds
of millions of Americans.”
But David Levine, a partner at
Groom Law Group, said the DOL is properly focused on the mix of investments
that can generate better returns.
“Having a portfolio-diversifying
alternative allows you to create a more holistic framework for retirement
wellness,” said Levine, whose firm represents Pantheon Ventures. “It’s almost
more dangerous to limit the tools that retirement savers can use.”
Teresa Ghilarducci, an economics
professor at the New School for Social Research, said private equity can be a
healthy part of well-managed long-term portfolios.
“Most 401(k)s are not
well-managed and are often used for short term purposes,” she wrote in an
email. “Private equity in 401(k)s is a half-step towards solving the fatal
flaws in the voluntary, individual directed, for profit 401(k) system.”
Christine Lazaro, a law professor
at St. John’s University, cautioned that ordinary investors don’t have the
background to parse private equity.
“By exposing non-accredited
investors to private placement through the context of their retirement
accounts, they are being subjected to risks that they don’t always have the
ability to assess and knowingly accept,” Lazaro wrote in an email.
The DOL implied the letter on
private equity investments was in part a response to President Donald Trump’s
recent executive order exhorting agencies to be innovative in spurring economic
recovery from the coronavirus pandemic.
Kelleher scoffed at that
“It’s mendacious for the DOL to
use the pandemic as a pretext for its latest anti-investor move,” he said.
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