On June 3, 2020, the Department of Labor (the “DOL”) published an Information Letter confirming that investment options under a defined contribution plan (e.g., a 401(k) or 403(b) plan) may include a limited allocation to private equity.  Notably, the Letter does not discuss direct investment in private equity funds (for example, by adding a PE fund to the plan’s investment lineup).  Rather, the Letter discusses including private equity as a small allocation within a diversified designated investment option such as a balanced fund or a target date fund (a footnote in the Letter suggests no more than 15%); and the Letter notes that direct investment in private equity would “present distinct legal and operational issues.”

The Letter emphasizes that selection and monitoring of an investment option with private equity is subject to the same fiduciary considerations as other investments (including the duties to be prudent and loyal, and the duty to avoid prohibited transactions).  At a high level, this includes evaluating whether the potential upside from the investment justifies the added risk, fees, complexity, and valuation and liquidity issues.  The Letter lists the following specific considerations:

  • Whether the investment option is sufficiently diversified to mitigate risk over a multi-year period;
  • Whether the investment option is overseen by plan fiduciaries (using third-party investment experts as necessary) or managed by investment professionals with the appropriate private equity-related expertise;
  • Whether the allocation within the investment option to private equity is sufficiently limited to address cost, complexity, disclosure, liquidity and valuation issues unique to the asset class (again, a footnote suggests no more than 15%);
  • Whether the investment option is appropriate for the participant profile (including, for example, participant ages, normal retirement age, anticipated employee turnover, and contribution and withdrawal patterns) and aligns with the plan’s characteristics and needs of plan participants;
  • Whether the plan fiduciary has the skills, knowledge and experience to make the required determinations regarding adding and monitoring such allocation, or whether it needs to seek expert guidance; and
  • Whether participants will be furnished adequate information regarding the character and risks of such an allocation (in particular, for plan fiduciaries relying on the protection provided under ERISA Section 404(c)).

Although the Letter includes detail that is unique to the private equity asset class, it does not change the law or general fiduciary responsibilities with respect to defined contribution plans.  In fact, some defined contribution plans have had private equity and other alternative asset allocations within their investment options for years; and challenges to the prudence of those investments are actively being litigated.  Also, the Letter references, and does not resolve, additional issues that might arise under ERISA’s prohibited transaction rules, as well as under securities, banking, tax, and other laws.

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The considerations for investment options under defined contribution plans continue to be complex, and depend on the needs of the particular plan and the participant base.  Proskauer’s cross-disciplinary employee benefits and asset management teams are focused on supporting and addressing these considerations in a practical way.

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Photo of Ira G. Bogner Ira G. Bogner

Ira G. Bogner is Managing Partner of the Firm. He is the immediate former chair of the Firm’s Tax Department. He is a member of the Employee Benefits & Executive Compensation Group and the Firm’s Executive Committee. Ira represents a varied list of…

Ira G. Bogner is Managing Partner of the Firm. He is the immediate former chair of the Firm’s Tax Department. He is a member of the Employee Benefits & Executive Compensation Group and the Firm’s Executive Committee. Ira represents a varied list of clients, including financial service companies, entertainment industry clients, and tax-exempt organizations, and also actively represents individual executives in executive compensation matters.

Ira counsels clients with respect to the tax, securities law disclosure, corporate governance, stock exchange and other requirements relevant to executive compensation arrangements. Ira also provides advice regarding equity arrangements, employment agreements, change in control agreements and all other types of executive compensation arrangements, including guidance regarding “409A,” “162m,” “457A,” and “280G.”

Ira frequently is called on to structure and analyze alternative investments for pension trusts and other exempt organizations. He also works with the Firm’s corporate and real estate lawyers in structuring and maintaining investment funds that include participation by pension plans. Through his work in the investment fund area Ira has obtained substantial experience in applying the rules provided under the “plan asset” regulations, including the operation of venture capital operating companies and real estate operating companies. He has assisted in the formation of private equity, real estate, infrastructure and hedge funds, including “fund of funds.” Ira also has advised clients on both avoiding ERISA “plan asset” status and operating an investment fund in accordance with ERISA.

Areas of Concentration

Ira has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including:

  • investment of plan assets
  • implementation of employee benefit plans

  • employee benefit issues in mergers and acquisitions

  • awarding of equity-based compensation

  • negotiation and drafting of employment agreements and severance arrangements

  • structuring, analyzing and maintaining investment funds that are suitable for plan investors

Thought Leadership

Ira has published a number of articles in publications such as The New York Law Journal, The New Jersey Law Journal, The Daily Deal, The Journal of Pension Planning and Compliance, Mergers and Acquisitions (The Monthly Tax Journal), The Journal of Taxation and Regulation of Financial Institutions, The Metropolitan Corporate Counsel, European Private Equity & Venture Capital Associations, The LPA Anatomised and Private Equity International and has been named to the Board of Advisors of the Journal of Taxation and Regulation of Financial Institutions. He also has lectured on topics such as the classification of workers, drafting employment agreements, equity alternatives for senior executives, investing IRA assets, the plan asset regulations, shareholder approval of equity plans, Code Section 409A, and key provisions for ERISA investors investing in a private equity fund.

Recognition

Ira has been recognized and ranked by various directories. US Legal 500 has carried the following comments: “Ira Bogner is ‘available, responsive and knowledgeable;” “Ira Bogner ‘provides a level of comfort with respect to business issues that is rare in the world of ERISA;” “Ira Bogner is the ‘go-to guy for fund sponsors needing help with ERISA.’”

Photo of Seth Safra Seth Safra

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined…

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined benefit to cash balance and floor-offset arrangements, ESOPs and 401(k) plans—often coordinating qualified and non-qualified arrangements. He also advises tax-exempt and governmental employers on 403(b) and 457 arrangements, as well as innovative new plan designs; and he advises on ERISA compliance for investments.

On the health and welfare side, Seth helps employers provide benefits that are cost-effective and competitive. He advises on plan design, including consumer-driven health plans with HSAs, retiree medical, fringe benefits, and severance programs, ERISA preemption, and tax and other compliance issues, such as nondiscrimination and cafeteria plan rules.

Seth also advises for-profit and non-profit employers, compensation committees, and boards on executive employment, deferred compensation, change in control, and equity and other incentive arrangements. In addition, he advises on compensation and benefits in corporate transactions.

Seth represents clients before the Department of Labor, IRS and other government agencies.

Seth has been recognized by Chambers USA, The Legal 500, Best Lawyers, Law360, Human Resource Executive, Lawdragon and Super Lawyers.

Photo of Adam Scoll Adam Scoll

Adam Scoll is a partner in the Firm’s Tax Department and Private Funds Group.

He specializes in the area of Title I of ERISA and the investment of ERISA “plan assets,” advising both pension trusts and their investment managers and advisers with regard…

Adam Scoll is a partner in the Firm’s Tax Department and Private Funds Group.

He specializes in the area of Title I of ERISA and the investment of ERISA “plan assets,” advising both pension trusts and their investment managers and advisers with regard to compliance with ERISA’s complex fiduciary duty and prohibited transaction rules.

Adam regularly advises private investment fund sponsors regarding the structuring of their funds in order to accept investments from ERISA-covered pension trusts, including compliance with the ERISA “plan asset” regulations and the operation of venture capital operating companies (VCOCs) and real estate operating companies (REOCs).

Adam also represents both employers and senior executives in the negotiation and drafting of employment and separation agreements, deferred compensation plans, and equity and “phantom equity” arrangements, including compliance with the nonqualified deferred compensation rules under Sections 409A and 457A of the Internal Revenue Code.

Photo of Pamela Onufer Pamela Onufer

Pamela is a special pension investment counsel who focuses her practice on ERISA, with special emphasis on ERISA’s fiduciary and prohibited transaction rules. She has extensive experience assisting both single-employer and multiemployer benefit plan clients in reviewing and negotiating various investment-related agreements and…

Pamela is a special pension investment counsel who focuses her practice on ERISA, with special emphasis on ERISA’s fiduciary and prohibited transaction rules. She has extensive experience assisting both single-employer and multiemployer benefit plan clients in reviewing and negotiating various investment-related agreements and documents, including documentation related to separate accounts, collective trust funds, private equity funds, hedge funds, fund-of-funds, custody agreements, trust agreements, portfolio transition management agreements, investment policies and guidelines and ISDAs.