Did DOL Guidance Permit Private Equity Investments in 403(b)s and 457(b)s?

“I was reading about some recent guidance from the Department of Labor permitting private equity investment in 401(k) plans. Would that apply to 403(b) and 457(b) plans as well? And how does it work?”

Stacey Bradford, Charles Filips, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Great question. First, let’s summarize the guidance. Put simply, the guidance provides the Department of Labor’s (DOL)’s view that a defined contribution (DC) plan can consider and use private equity in an investment lineup as part of an asset allocation fund (such as a target-date fund (TDF), balanced fund, etc.) offered in the plan. In addition, the guidance provides considerations plan fiduciaries can take into account in evaluating, selecting, and monitoring investment options that have private equity allocations.

Second, let’s review what types of plans are covered by the DOL’s guidance.

Private-sector 403(b) plans, like those provided by private schools, universities, and 501(c)(3) charitable organizations, are usually subject to the Employee Retirement Income Security Act of 1974 (ERISA). However, public-sector and church-sponsored 403(b) plans are not usually subject to ERISA. Similarly, 457(b) plans come in public and private (including non-profit entities) versions. However, both public and private employer 457(b) plans are not subject to ERISA’s fiduciary rules.

Third, now that it is clear that only some 403(b) plans are officially covered by this guidance, the answer to your question is yes, fiduciaries of ERISA-covered 403(b) plans can look to this guidance in selecting the annuity and mutual funds inside their plans. However, keep in mind that 403(b) plans (with the exception of 403(b)(9) plans) may not invest directly in private equity funds, and any investment in private equity by 403(b) plans is accomplished through the annuities and mutual funds selected by the plan.

Fourth, with respect to governmental, church plans, and some deferral-only 403(b) plans not subject to ERISA, the DOL guidance isn’t technically applicable. However, because many governmental and church plans look to ERISA (subject to any applicable state or local law requirements), this guidance is still helpful insight on how to develop a prudent fiduciary process if a 403(b) or 457(b) plan is adding investment options with private equity allocations to their plans.

Now that the guidance has been issued, the Experts anticipate we will see products involving private equity and other alternative investments coming to market. We’ll all be watching for what comes next.

Thanks for asking!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.