Defined Contribution

DOL Issues Common-Sense Information Letter About Private Equity in DC Plans

DOL Issues Common-Sense Information Letter About Private Equity in DC Plans
2 min 27 sec

In an information letter released in June, the Department of Labor said that defined contribution (DC) plan sponsors considering the inclusion of private equity in their plans (in a multi-asset framework) must adhere to the same standards and weigh the same considerations as they would for other asset classes. Namely, plan fiduciaries “have duties to prudently select and monitor any designated investment alternative under the plan.”


The DOL’s June 3 letter came in response to a request from the Groom Law Group (on behalf of Pantheon Ventures (US) and Partners Group (USA)).

The DOL wrote that “a plan fiduciary would not violate the fiduciary’s duties under section 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in this letter.”

The letter reminds plan sponsors that the inclusion of private equity must stem from a prudent selection and monitoring process. The fiduciary must engage in an objective, thorough, and analytical process that considers all relevant facts.

Specific to private equity, the DOL said, fiduciaries should also consider:

  • Liquidity and valuation: The sizing of the positions should take into consideration the cost and liquidity of the asset class. With regard to valuation, the letter mentions that plans may require independent valuation according to Financial Accounting Standards Board Accounting Standards Codification 820, “Fair Value Measurements and Disclosures.”
  • Diversification: The sponsor should consider the diversification of risks over a multi-year period.
  • Capacity and ability: Those in a fiduciary position should have the capabilities, experience, and stability to manage an asset allocation fund that includes private equity investments effectively given the nature, size, and complexity of the asset class.

For participant-directed plans, the fiduciary must also determine whether plan participants will be provided adequate information regarding the characteristics and risks of the investment alternative to enable them to make an informed assessment regarding an investment in the fund.

Bottom Line

While not a ringing endorsement, the letter does provide clarity around appropriate steps and considerations for private equity in DC plans. As sponsors consider including private equity—or any asset class for that matter—the potential benefit to participants must be weighed against the additional complexity and cost.

Over the past decade, straying from “mainstream” asset classes (public equity and fixed income) brought little benefit to offset the expense as low-cost beta (think the S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index) boasted solid returns. Also consider that the 37% of plans using passive target date options often have fees well below 10 basis points. Quite simply, there has not been a benefit to being exotic when it comes to asset class selection.

For private equity or any other asset class to gain a foothold, we will need the next decade to provide a tangible benefit to diversification to justify the cost and complexity of implementation.

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts

A Deeper Look at How We Did With Our Capital Markets Assumptions

Julia Moriarty
An analysis of how Callan's Capital Markets Assumptions performed over time by asset class.
Private Markets

Significant Drops in Private Equity Activity From Peak Years of 2021-22

Ashley Kahn
Callan expert analyzes private equity activity in 1Q24, from fundraising to exits.
Private Markets

Sector-Specialist Strategies: What Institutional Investors Need to Know

Chrissy Mehnert
A look at sector-specialist strategies and how institutional investors can analyze them.

The Newest and Final 'Fiduciary Rule'

Jana Steele
What the Department of Labor's Final Fiduciary Rule means for DC plan sponsors.

Callan 2024 DC Trends Survey: Focus on Plan Governance, and Continued Efforts to Rein in Fees

Jamie McAllister
A summary of Callan's 2024 Defined Contribution Trends Survey.
Private Markets

Private Equity Sees a Big Slowdown After Frenzy of 2021

Ashley Kahn
An update on private equity performance in 4Q23 and for the year.
Private Markets

Private Equity Investors Focus on Exits as Activity Drops

Alternatives Consulting Group
The Alternatives Consulting Group provides an update on private equity performance in 3Q23.

Key Issues to Know for the Proposed Fiduciary Rule

Jana Steele
Jana Steele explains what the new proposed fiduciary rule means for DC plan sponsors.

What Investors Need to Know About the SEC’s 2023 Private Funds Rules

Alternatives Consulting Group
The Alternatives Consulting Group analyzes the new SEC rules on unregistered private funds.

IRS Delays SECURE 2.0 Roth Catch-ups

Jana Steele
Jana Steele explains why the IRS delayed rules for Roth catch-up contributions.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.