By Jeffrey Kline, CRPS®, AIF®

The U.S. Department of Labor issued an updated opinion on June 3, 2020, regarding the utilization of private equity investments in participant-directed qualified retirement plans. The DOL confirmed that the Employee Retirement Income Security Act (ERISA) does not prohibit plan fiduciaries from selecting investment vehicles that utilize private equity as a component of the investment. It did, however, state that individual private equity investments would not be appropriate due to the high risk and high fee aspect of the investment for the average plan participant investor.

Plan fiduciaries have the responsibility to act prudently in the participants’ best interest when selecting an investment offering within the company-sponsored retirement plan. This includes evaluating the risk and benefits, investment expenses, valuation and liquidity of the investment for their employees. In addition to this, they need to properly disclose this information in a meaningful way that the average plan participant can understand through disclosure notices and participant education efforts.

In the Intel Corporation vs. Sulyma case recently tried before the Supreme Court, Sulyma sued the Investment Committee of Intel Corp over the alternative and hedge fund investments within the custom target date fund in the 401(k) plan. The participant said, after significant losses during 2008-2009, he was not aware of the high-risk hedge fund investments and sued the committee for a breach of its fiduciary duties.

The Supreme Court ruled on whether or not the statute of limitations was up on the ability to sue the company. Once a participant has actual knowledge of the investment and therefore the breach, they have three years to take action. If they do not have actual knowledge of the breach, the timeframe for a lawsuit is six years. The court ruled that the participant did not have actual knowledge of the investment and was unaware of the investment in a hedge fund within his custom target date portfolio, despite information posted online through a company portal that the participant had access to and, in fact, visited multiple times. The court did not believe that was sufficient to explain the specific investment and risk associated with this investment for the plan participant.

Any investment offering within the retirement plan should be noted within the Investment Policy Statement and follow the guidelines set by the IPS. We recommend caution if your plan is considering offering investments that have private equity investments within the portfolio. Be sure you have a strong written plan to educate all participants about the risks, expenses and type of investment available for their retirement savings.

If you have questions or would like additional information, please contact our team at Stonebridge Financial Group.

Jeffrey KlineJeffrey Kline is a graduate of Lebanon Valley College and joined Stonebridge Financial Group in 2007. His primary responsibilities include managing the firm’s corporate retirement plan clients, relationship management, and business development.