The fledgling effort to include private equity as part of defined contribution plans could be vulnerable in a Democratic victory in November, sources told Buyouts.
Under a “blue wave” scenario, in which Democrats take the presidency and the Senate, progressive politicians like Sen. Elizabeth Warren would have more power to target aspects of the financial system they have consistently criticized, including private equity.
However, there could be a saving grace: progressives’ attention could be drawn by other, higher-profile issues, which would help shield this early effort to incorporate private equity into retirement accounts, other sources stressed.
This is speculative, of course: nationwide polling has consistently shown Senator Joe Biden leading President Donald Trump, but early polls also showed Hillary Clinton leading Trump in the run up to the 2016 presidential elections, which she ultimately lost.
“We would expect there to be the potential for rollback on this [Department of Labor] guidance given Democratic opposition to private equity in retail investor retirement plans,” said a private equity source with connections to Washington, DC.
The Department of Labor issued guidance in early June that managers of defined contribution plans like 401(k)s and IRAs would not violate their fiduciary duty under federal law by including private equity as part of their investment offerings accessible to individual workers.
The guidance, issued through what’s known as an “information letter,” also laid out specific details on how DC fiduciaries should prudently consider incorporating private equity into their offerings.
The industry celebrated the DOL’s move: “This guidance from the Department of Labor finally gives individual Main Street investors access to the same types of high-performing investments as big institutional investors, all within the safety and robust investor protections of their 401(k) plan. This is a win for savers and a major step forward for our retirement system,” said Drew Maloney, president and CEO of the American Investment Council, a private equity lobby group.
But several Democratic senators blasted the move as potentially harmful to American workers.
“Private equity has a long-standing track record of profiting at the expense of workers,” according to the June 12 letter, signed by Senators Sherrod Brown, Elizabeth Warren, Bernard Sanders, Tammy Baldwin, Sheldon Whitehouse, Jeffrey Merkley and Edward Markey.
“Encouraging additional investment through private equity – as your June 3 information letter does – fuels this model of destruction-for-profit. Target-date plans often serve as the default investment option in defined contribution plans with more than $1.7 trillion invested in target-date funds at the end of 2018. These defaults could soon comprise, in part, private equity investments, and retirement plan participants may not even know that they are not only benefiting from, but also participating in, the pillaging of American workers,” the letter said.
Easy to pull back
The form of guidance also makes the effort particularly vulnerable, coming through an informal “information letter” as opposed to a more rigorous rule-making process. Such information letters have been used by past administrations and not subsequently overturned by predecessors, sources said.
“It’s much easier to say, ‘we’re pulling back a letter.’ You don’t have to go through some formal process of going through the Federal Register and proposing a new rule,” according to a source with experience in federal policy-making.
“Could they come in and quickly pull the letter back? Yes. Would they? That’s more difficult to know. One big reason, and the Biden folks know this, 401(k) investors have got to find ways to find higher returns,” the source said. Interest rates “have been low for a decade. Private equity has the potential to provide a sliver of higher returns and that’s why the DOL was very much justified in laying out a way that an ERISA fiduciary for 401(k) plans can incorporate a slice of PE into managed funds with a lot of guard rails.”
The question is, if a new administration were to come in and rescind the guidance, would they also provide a solution for the need of individual investors for more return in a low interest rate environment, the source said. “What’s not going away is low interest rates, or the need to find ways to help people save more money in 401(k) or have higher returns,” the source said.
The guidance laid out a fairly extensive process for including private equity in defined contribution plans, including steps for liquidity flexibility, dealing with the higher fees that come with alternative investments, transparency and caps on private equity exposure.
More than anything, the guidance provided a path for individual investors to get access to private equity, something for which they had no option in the past, sources said.
“The big picture here, [the DOL] was trying to generate the best possible outcome for employees and retirees and give them access to all the opportunities that one could have,” said a GP who has worked on efforts to move private equity into 401(k)s. “This is really a bipartisan issue, this is about fairness, about giving everyone access to these investments. It’s not about forcing people to have them.”
The DOL guidance was necessary after a 2015 lawsuit by former Intel employee Christopher Sulyma accused the company and its retirement plan managers of increasing risk and costs, hurting plan participants, by including private equity and hedge funds.
The lawsuit left DC plan managers reluctant to add PE into their offerings for fear of violating their fiduciary duties under ERISA. The DOL guidance sought to obviate that fear.