401(k) Plans Get Green Light for Private Equity

The U.S. Department of Labor said defined contribution plans can offer private equity exposure through vehicles such as target-date funds.

Al Drago/Bloomberg

Al Drago/Bloomberg

The U.S. Department of Labor has issued guidance that allows companies to include private equity in defined contribution plans through vehicles such as diversified target date funds.

Alternative investment managers Pantheon and Partners Group had asked the DOL in June 2018 for an information letter or other action that would allow plan sponsors to add private equity to the funds that have become default investment options for many 401(k) participants. Private equity firms have long argued that alternative investments will help diversify the portfolios of individual investors — a group that represents a huge new market for alternatives firms looking to expand.

“The biggest hurdle has been the perceived risk of litigation from plan participants,” Doug Keller, head of private wealth at Pantheon, said in an interview with Institutional Investor. “There have been about 100 class-action lawsuits since 2015, some as simple as index funds charging nine basis points instead of six basis points. Those have really stifled innovation.”

[II Deep Dive: Mainstream Investors Might Get Access to Alts, But They Won’t Get Alpha]

Keller said Pantheon and Partners Group wanted the DOL to essentially address the litigation risk and determine whether private equity was allowed under federal law and how plans should specifically think about adding private equity to their plans.

“This is the first time they [DOL] have opined in a public way about private equity or alternative assets within 401k plans,” he said. Pantheon and Partners Group didn’t ask for guidance on standalone private equity options.


“We are realistic in sense that no one wants to be the first participant in anything that is breaking new ground,” Keller said. But he added that the DOL guidance removes any fears over litigation. “The letter is the lynch pin here,” he said.