Last week, the U.S. Department of Labor (the "DOL") on December 21, 2021 issued a supplement (the “2021 Supplement”) to a June 2020 Information Letter (the "2020 Information Letter") that had addressed the possible use of private equity ("PE") investments in investment options offered under participant-directed individual-account retirement plans ("Plans"), such as "401(k)" plans, that are subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). The 2021 Supplement and the 2020 Information Letter relate to the use of PE investments within professionally managed asset-allocation funds (e.g., so-called "target date" funds) that are often used as investment alternatives for Plan participants and beneficiaries. We previously discussed the 2020 Information Letter, which may be found here.

The 2020 Information Letter, issued under the Trump administration, had repeated the basic principles that "a plan fiduciary would not, in the view of the [DOL], violate the fiduciary’s duties under . . . ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a [PE] component as a designated investment alternative for [a Plan]." While the 2020 Information Letter arguably broke no new analytical ground, it seems to have been intended to provide some comfort for Plan fiduciaries that may have been concerned about including an asset allocation fund with a PE component as a designated investment alternative for a Plan. Regardless, in some circles, the 2020 Information Letter seemed to have been viewed as a signal in favor of the possible inclusion of PE strategies for Plans.

Following the release of the 2020 Information Letter, the U.S. Securities and Exchange Commission’s (the "SEC") on June 23, 2020 issued a risk alert highlighting compliance issues in examinations of registered investment advisers that manage PE funds or hedge funds. The SEC Risk Alert, in a passage cited by the DOL in the 2021 Supplement, states that certain deficiencies under private PE and hedge funds "may have caused investors in private funds to pay more in fees and expenses than they should have or resulted in investors not being informed of relevant conflicts of interest concerning the private fund adviser and the fund."

With this background, the 2021 Supplement, issued under the Biden administration, notes the following:

• "After carefully considering the stakeholder input and the implications of the SEC Risk Alert, the Department concluded that it should supplement the Information Letter to ensure that plan fiduciaries do not expose plan participants and beneficiaries to unwarranted risks by misreading the letter as saying that PE—as a component of a designated investment alternative—is generally appropriate for a typical 401(k) plan."
• "The recitation in the [2020] Information Letter of representations by the requester regarding the claimed benefits of PE investments reflected the perspective of the PE industry; the representations were not balanced with counter-arguments and research data from independent sources."
• "Stakeholder concerns about the ability of the sponsoring employer and other plan-level fiduciaries in a typical 401(k)-type plan to fulfill [its fiduciary] obligations led the Department to conclude that it should [now] emphasize those parts of the letter."
• "The [2020] Information Letter addressed the use of private equity investments within professionally managed asset allocation funds designated as investment alternatives for participant-directed individual account plans. In no case would the private equity component of the asset allocation fund be available as a vehicle for direct investment by plan participants and beneficiaries on a stand-alone basis. The [2020] Information Letter cautioned that direct investments in private equity investments present distinct legal and operational issues for fiduciaries of ERISA-covered individual account plans."

Against that backdrop, the 2021 Supplement "cautions against application of the Information Letter" in the Plan-related context, stating that "plan-level fiduciaries of small, individual account plans are not likely suited to evaluate the use of PE investments in designated investment alternatives in individual account plans."

It is axiomatic that many legal, commercial and operational challenges are associated with the possible inclusion of PE strategies under Plans that is addressed by the 2021 Supplement. Ultimately, however, like the 2020 Information Letter, the 2021 Supplement seems not to break any real new analytical ground.* Indeed, assuming that all technical legal requirements are satisfied, the basic principles under ERISA generally do not endorse or proscribe any particular investment strategy, and the 2021 Supplement (like the 2020 Information Letter) of necessity operates through that prism.

Nevertheless, as the regulatory pendulum swings from one administration to another, there can be differences in tone offered by the regulators. For example, in the 2020 Information Letter, the DOL noted that the SEC urged that the DOL "address uncertainties regarding ERISA that may be impeding plan fiduciaries from considering [PE] investment opportunities as a way to enhance retirement savings and investment security for American workers." The different tone that emerges from the 2021 Supplement is palpable, and it will be up to Plan fiduciaries to determine – at least until the pendulum swings again - whether and how much that change in tone is relevant to the manner in which investment alternatives are offered under Plans.

Footnotes

*By its nature, a DOL information letter "is a written statement . . . that does no more than call attention to a well-established interpretation or principle of [ERISA], without applying it to a specific factual situation." ERISA Proc. 76-1, § 3.01.