Slow going for PE in US DC pensions

The changes needed to include private equity in defined contribution retirement plans are drastic.

The ability to have private equity investment in US defined contribution plans has long been considered the holy grail for the industry, potentially changing the fundraising model and opening the door to new sources of capital.

Defined benefit plans are slowly disappearing and being replaced by DC plans, which include mainly 401(k) retirement accounts. The 401(k) opportunity is a big one, with about $5.3 trillion in assets in the US.

But as several delegates and panelists discussed at the Forum, there are a lot of challenges remaining, and unless some laws and regulations change, particularly related to Employee Retirement Income Security Act requirements, it may never happen.

“The opportunity is huge, but the hurdles are equally huge,” said one GP.

One panelist whose firm has done some work on including private equity in 401(k)s noted that it could address most challenges, including the need for daily valuation and liquidity, but the fiduciary duty “is the biggest hurdle we’re struggling with. We’re still stuck on it.”

The risk is real. In 2015, Intel Corporation was sued by a former employee claiming that retirement plan executives breached their fiduciary duty by over-allocating to alternative investments including hedge funds and private equity funds to investment choices in two DC plans.

Although the plaintiff lost the case last year due to the statute of limitations for suing under ERISA, the case sent chills through the industry.

Another panelist noted a change to the accounts might be the way forward. “In countries where we’ve seen DC plans hold assets, they have a different structure and they have fiduciaries,” he said, adding that in Australia, retirement assets are sponsored by superannuation plans rather than by individual companies.

“In the US, each company is its own fiduciary of its own plan. They choose the investment options,” he added. “In other countries where we’ve seen this work, it’s actually been the retirement sponsors that are the fiduciaries. When a sponsor is large enough and has enough of a user base, they can act more like a DB plan.”

Besides changing laws, educating DC plan participants, who select investments in their retirement plan, about private equity will also be needed.

“Maybe we need a complete overhaul of how we manage our 401(k)s, where you don’t have to educate everybody,” a panelist concluded. “Instead, maybe the government takes over and you put your assets in there. Think of what a change that would be.” n