Committee Supports DOL Action to Expand 401k Access to Private Equity

CAMBRIDGE, Mass., June 5, 2020 /PRNewswire/ -- Earlier this week, the Department of Labor clarified that under existing law U.S. retirees with 401(k) plans can allocate a portion of their savings to investments in private equity funds. According to Hal Scott, the President of the Committee on Capital Markets Regulation and Emeritus Nomura Professor, Harvard Law School, "the DOL's information letter is a major step towards providing U.S. retirees that have over $6 trillion in 401(k) retirement savings with access to the high returns and diversification benefits of private equity."

The Committee on Capital Markets Regulation, an independent research organization with thirty-five members drawn from the finance, law and academic communities, strongly supports expanded access to private equity for retirees and retail investors.

Presently, 401(k) plan fiduciaries generally do not provide retirees with access to private equity due to the risk of frivolous litigation alleging excessive fees or underperformance. The DOL's information letter should help address these concerns by clarifying that 401(k) investment options may include an allocation to private equity funds, so long as a plan fiduciary has evaluated the risks and benefits of doing so. Consistent with recommendations by the Committee, the DOL sets forth best practices for plan fiduciaries to consider such risks and benefits.

"I am glad to see that the DOL took this action pursuant to President Trump's Executive Order to remove barriers to economic growth and innovation," says Prof. Scott.

In addition to supporting the DOL action, Jay Clayton, Chairman of the Securities and Exchange Commission, has also indicated that the SEC is considering expanding retail investor access to private equity. According to research by the Committee, 98% of U.S. households cannot invest directly in private equity. As the number of public companies continues to shrink, retail investors are clearly missing out on investment opportunities.

The Committee has recommended expanding retail investor access to private equity through registered closed-end funds that primarily invest in private equity funds. Presently, only accredited investors with substantial net worth or high incomes can invest in such funds.

However, the SEC has implemented its accredited investor requirement for such closed- end funds informally through the registration process. As a result, "the SEC does not need to issue a new rulemaking to expand retail investor access to private equity. Rather, the SEC can simply allow closed-end funds that primarily invest in private equity funds to register without limiting access to accredited investors. The necessary investor protections for retail investors are in place, as registered funds must provide extensive disclosures as to investment risks and fees," according to the Committee's Executive Director, John Gulliver.

"The SEC should indicate its willingness to expand retail investor access to private equity funds through registered closed-end funds now," says Prof. Scott.

The Committee's report, Expanding Opportunities for U.S. Investors and Retirees: Private Equity, is available at the Committee's website: www.capmktsreg.org. Press inquiries may  be  directed  to  the  Committee's  Executive  Director, John  Gulliver at: [email protected]. 

SOURCE Committee on Capital Markets Regulation