ML BeneBits


The Department of Labor (DOL) delivered a surprise holiday gift on December 21, 2021 to fiduciaries of participant-directed 401(k) plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), as amended—issuing a supplemental statement (Supplement) to a June 2020 Information Letter (Letter) regarding the use of private equity investments in investment options. The thrust of the Supplement is that fiduciaries should not read the Letter as endorsing or recommending private equity investments in such plans and should proceed with caution in the use of such investments in a participant-directed 401(k) plan.

2020 Letter

The Letter set forth the then-DOL position on ERISA fiduciary duties regarding the use of professionally managed asset allocation funds with a private equity component as an investment option in a participant-directed 401(k) plan. The DOL concluded that a fiduciary would not breach its duties under ERISA solely by offering such an investment option provided the plan fiduciary met conditions set forth in the Letter. The DOL’s news release states that the Supplement is intended to clarify the scope of the Letter.

Motivation for the Supplement

The DOL indicated the Supplement is “to ensure that plan fiduciaries do not expose plan participants and beneficiaries to unwarranted risks by misreading” the Letter. According to the Supplement, the DOL received questions and reactions from a range of stakeholders and felt compelled to issue the Supplement to address industry reactions. In addition, the Securities and Exchange Commission (SEC) issued a “Risk Alert” shortly after the Letter was issued that highlighted three areas of concern regarding funds that include private equity investments: conflicts of interest; fees and expenses; and policies and procedures regarding material nonpublic information.

The DOL also summarized the reactions from stakeholders into two main categories. First, some stakeholders are concerned that the Letter focused on the “claimed” benefits of private equity investments without balancing those perceived benefits with the drawbacks and additional risks associated with private equity investing. Second, stakeholders are worried that the Letter may have misguided plan fiduciaries regarding the level of expertise and sophistication required to determine whether to invest in funds that include private equity investments in accordance with the plan fiduciary’s duties under ERISA.

Clarification in the Supplement

The Supplement states loud and clear that the Letter (1) “did not endorse or recommend” investment options with private equity components and (2) should not be read to mean that such investment options are “generally appropriate for a typical 401(k) plan.” Instead, the Supplement clarifies that the Letter’s purpose was to emphasize the complexity, unique characteristics and risks associated with private equity investments, and to reinforce that plan fiduciaries should deploy an objective and thorough analytical process to evaluate the risks and benefits of such investments.

The DOL further emphasized that the “limited focus” of the Letter was “a response to large plan sponsors who offer both defined benefit plans and participant-directed retirement savings plans, and who invest in private equity for their defined benefit plans”—as stated by Acting Assistant Secretary for Employee Benefits Security Ali Khawar. The Letter was not intended for fiduciaries of plans without this private equity experience from defined benefit plans. The Supplement cautions that fiduciaries of small plans are not likely suited to perform the necessary evaluation of funds that include private equity investments.


While the Supplement does not slam the brakes on private equity investments in 401(k) plans, it emphasizes the tension between the current DOL’s views and those of the prior administration. As we have seen in other contexts, such as environmental, social, and governance (ESG) investing and proxy voting, this tension has evolved into a sort of regulatory ping pong match that we expect may continue.

We also remind readers of the joint letter to the US Government Accountability Office from Senator Patty Murray and Representative Robert “Bobby” Scott, as discussed in a previous LawFlash—which called for the review of the use of target date funds in 401(k) plans—and included concerns about the appropriateness of the use of “potentially higher risk and more lightly-regulated ‘alternative’ assets, such as private equity” to populate target date fund asset allocations.

How We Can Help

If your participant-directed defined contribution plan currently incorporates private equity, if you are a plan fiduciary considering the use of private equity, or if you are an investment manager seeking to offer private equity investments to defined contribution plans, we are here to help you navigate the DOL’s evolving position in this area. Please reach out to one of the authors or your primary Morgan Lewis benefits contact for additional information.