The Department of Labor gave 401(k) plans permission to include private equity strategieswithin diversified investment options suchas target date, target risk or balanced funds.
In an information letter to a law firmrepresenting clients who provide privateequity strategies to retirement plans, DOLattorney Louis J. Campagna wrote that aplan fiduciary “may offer an asset allocation fund with a private equity component … in a manner consistent with therequirements of Title I” of the EmployeeRetirement Income Security Act.
The DOL letter, sent to the Groom LawGroup on behalf of Pantheon Venturesand Partners Group, allows a privateequity option within defined contribution plans but does not require it.
The letter notes “important differences between a fiduciary’s decision toinclude private equity investments inthe portfolio of a professionally managed defined benefit plan, and the decision to include an asset allocation fundwith a private equity component as partof the investment lineup for a participant-directed individual account plan.”Private equity strategies and structures tend to be more complex, withlonger time horizons and higher feesthan publicly traded securities, whichare the typical investment options in DCplans, according to the DOL.
Given those differences, the let-
ter lays out certain considerations for
defined contribution fiduciaries to con-
sider before including a private equity
option in allocation, including:
• The risks and benefits associated
with the private equity investment alter-
natives along with range of expected
returns net of fees and diversification of
risks over a multi-year period;
• The ability of plan fiduciaries toevaluate and monitor these investmentsor choose a consultant or manager forthat task;
• The liquidity component of privateequity to manage participant-directeddeposits and withdrawals and whetherany potential liquidity restrictions alignwith the plan participant population, interms of age, turnover and contributionand withdrawal patterns.
FINRA GIVES WARNING ON
The Financial Industry RegulatoryAuthority put the business of sellingoil-linked exchange-traded products,or ETPs, on notice that these products should not be sold to the average investor, at least not without fulldisclosure and understanding of whatrisks these products hold. Further, as ofJune 30, 2020, these products, like othersecurities, will be governed under theRegulation Best Interest rule.
As the FINRA notice states, the June2020 WTI futures contract price fell43% to close at $11.57 a barrel only aday after the May 2020 futures contractdove into negative territory, settling atminus $37.63 per barrel.
“This plunge in market value has significantly impacted ETPs trading WTI[crude oil] futures,” the release states.
FINRA outlined examples of ETPs
that caused investors harm. On April 22,
FINRA states, the “largest oil-related
ETP lost 41% of its value in one week.
This ETP also subsequently adjusted
to its investment focus from near-dated
futures to longer-dated contracts.”
FINRA says it’s been suggested that
retail investors were getting into this
product, and in fact, surging demand
“led to a dramatic increase in new share
issuance, which ultimately exhausted
the number of available shares permit-
ted to be issued under the ETP’s existing
registration statement,” FINRA states.
In another case, an ETN tracking
WTI crude oil futures “announced an
FINRA states that retail investors and
those selling these oil-linked ETP prod-
ucts may have thought they were a proxy
for the spot price of oil instead of tracking
oil futures contracts or indexes. The com-
plexity of these products may make them
“not be suitable for some investors, such as
retail investors with conservative invest-
ment objectives and long-time horizons.”
Suitability and Regulation Best Interest
rules come into play and requires a firm or
its reps to have to have a “reasonable basis”
to believe these products are suitable for
the client, and that they understand the
strategy and potential risks involved. Also,
the associated person has to be capable
of explaining “at minimum, the products
main features and associated risks” as well
as differences in ETP products.
Bernice Napach can be reached firstname.lastname@example.org. Ginger Szala can bereached at email@example.com.
By Bernice Napach and Ginger Szala
DOL Gives Green Light for Private Equity in 401(k)s
Meanwhile, FINRA warns advisors, investors on oil-linked ETPs.