Key Takeaways
- • The U.S. Department of Labor issued an Information Letter on June 3, 2020, clarifying the regulatory pathway for private equity investments within professionally managed asset allocation funds offered in defined contribution plans, including 401(k)s—a significant expansion from their traditional use in defined benefit plans.
- • Secretary of Labor Eugene Scalia framed the guidance as enabling retail retirement savers to access alternative investments historically available only to institutional investors, positioning it as democratizing investment choice for ordinary Americans.
- • SEC Chairman Jay Clayton endorsed the measure as aligning 401(k) investment options with diversified public-private asset allocation strategies employed by well-managed pension funds, enhancing both investor choice and fiduciary oversight.
- • The Information Letter addresses fiduciary prudence standards and operational considerations, providing plan fiduciaries with a framework for evaluating and monitoring private equity components within multi-tiered asset allocation funds.
- • The guidance was issued under Executive Order 13924 (May 19, 2020), positioning private equity access as part of the Trump administration's post-pandemic economic recovery regulatory relief agenda.
Summary
The U.S. Department of Labor formally expanded regulatory guidance on private equity investments in retirement accounts by issuing an Information Letter under the Employee Retirement Income Security Act (ERISA) on June 3, 2020. The letter addresses the incorporation of private equity as a component within professionally managed asset allocation funds offered as investment options in defined contribution plans, such as 401(k) plans—a structure that has historically been unavailable to individual retail investors, though private equity has long been a staple in defined benefit pension plans.
The guidance emerged directly from President Trump's May 19, 2020 Executive Order 13924 on Regulatory Relief to Support Economic Recovery, which directed federal agencies to remove barriers to economic growth and innovation in response to the COVID-19 pandemic's economic impact. Secretary of Labor Eugene Scalia characterized the Information Letter as democratizing access to alternative investments for ordinary Americans saving for retirement, stating it "will help Americans saving for retirement gain access to alternative investments that often provide strong returns" and "help level the playing field for ordinary investors."
SEC Chairman Jay Clayton provided regulatory validation for the initiative, commending the DOL's effort to enhance investor choice and protection. Clayton emphasized that the guidance would enable "long-term Main Street investors" to access professionally managed funds that replicate the diversified public-private asset allocation strategies deployed by institutional pension funds, while ensuring selection and ongoing monitoring by ERISA fiduciaries. This framing positions the guidance as combining expanded market access with maintained fiduciary accountability.
The Information Letter outlines prudent evaluation processes that plan fiduciaries must employ when considering private equity-inclusive asset allocation funds, addressing the distinct legal and operational considerations associated with private equity investments within the defined contribution context. Rather than permitting direct private equity investments, the guidance focuses on private equity as a component within professionally managed, diversified funds—a structure designed to mitigate concentration risk and operational complexity while maintaining appropriate diversification standards.
The regulatory action represents a material shift in alternative asset accessibility for retail investors, bridging a historical gap between institutional-grade alternative investment strategies and defined contribution plan participants, contingent upon appropriate fiduciary oversight and prudent fund construction.
The guidance emerged directly from President Trump's May 19, 2020 Executive Order 13924 on Regulatory Relief to Support Economic Recovery, which directed federal agencies to remove barriers to economic growth and innovation in response to the COVID-19 pandemic's economic impact. Secretary of Labor Eugene Scalia characterized the Information Letter as democratizing access to alternative investments for ordinary Americans saving for retirement, stating it "will help Americans saving for retirement gain access to alternative investments that often provide strong returns" and "help level the playing field for ordinary investors."
SEC Chairman Jay Clayton provided regulatory validation for the initiative, commending the DOL's effort to enhance investor choice and protection. Clayton emphasized that the guidance would enable "long-term Main Street investors" to access professionally managed funds that replicate the diversified public-private asset allocation strategies deployed by institutional pension funds, while ensuring selection and ongoing monitoring by ERISA fiduciaries. This framing positions the guidance as combining expanded market access with maintained fiduciary accountability.
The Information Letter outlines prudent evaluation processes that plan fiduciaries must employ when considering private equity-inclusive asset allocation funds, addressing the distinct legal and operational considerations associated with private equity investments within the defined contribution context. Rather than permitting direct private equity investments, the guidance focuses on private equity as a component within professionally managed, diversified funds—a structure designed to mitigate concentration risk and operational complexity while maintaining appropriate diversification standards.
The regulatory action represents a material shift in alternative asset accessibility for retail investors, bridging a historical gap between institutional-grade alternative investment strategies and defined contribution plan participants, contingent upon appropriate fiduciary oversight and prudent fund construction.
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