Last month the US Department of Labor (Department) issued an Information Letter stating that it is possible for individual account plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) to offer limited private equity investments in a manner that complies with ERISA, provided certain suitability issues are considered by plan fiduciaries. The Information Letter confirms that a plan fiduciary would not violate ERISA fiduciary duties “solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component.” Similarly, the Information Letter confirms that fiduciaries may offer private equity as a small component of an ERISA plan’s diversified investment option, like a target date fund, a target risk fund, or a balanced fund.
The Information Letter points out that there may be reasons why a plan fiduciary may properly select an asset allocation fund with a private equity component as a designated investment alternative for a participant-directed individual account plan. The Information Letter did not address any potential issues under the ERISA prohibited transaction rules regarding private equity investments and also did not sanction direct investment in private equity.
The Department provided a number of significant issues that a plan fiduciary must consider when investing plan assets in an asset allocation fund with a private equity component, as follows:
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