Schlichter Bogard & Denton Senior Partner Jerry Schlichter Quoted by The Wall Street Journal

Earlier this month, the U.S. Department of Labor (“DOL”) issued a letter clarifying its views on “the use of private equity investments in designated investment alternatives made available to participants and beneficiaries in individual account plans,” such as 401(k) plans subject to ERISA.  The DOL confirmed that 401(k) plans may offer private equity investments in diversified funds, including target-date funds.

Also known as dynamic-risk or age-based funds, the asset allocation mix of such portfolios become more conservative as participants age and a target date – usually retirement – approaches.  The default investments in many 401(k) plans, target-date funds receive, on average, more than half of participants’ contributions.

The downside?  After years of declining 401(k) fees, the addition of private-equity funds will surely translate to higher fees for participants: as noted by The Wall Street Journal, “private-equity fund managers generally collect a 2% management fee plus 20% of the profits, versus less than 0.5% a year, on average, for the stock funds that dominate 401(k) menus.”

For private-equity funds in retirement plans to make sense for American workers and retirees, say critics, such funds would have to consistently outperform traditional investments to compensate for higher fees and the heightened risk investors assume when buying illiquid securities.

Crediting Schlichter Bogard & Denton with pioneering 401(k) litigation, The Wall Street Journal asked Senior Partner Jerry Schlichter to weigh in.  Employers must demonstrate that “adding private equity will increase after-fee returns,” said Mr. Schlichter. “These are quite high-priced investments and it will be difficult to determine that they are likely to beat the market after fees.”

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