June 8, 2020

Feds Find Favor in Freeing Funds

DOL Acknowledges Retirement Investing Can Extend Beyond Wall Street

What does the Department of Labor have to do with your retirement planning? A lot. The DOL regulates the kinds of assets that your IRA and 401k can invest in and tries to make sure that brokers follow the Fiduciary Rule. In short, a broker or administrator handling your retirement funds needs to make investment choices that are clearly for your benefit.

Because of these rules, most retirement accounts are invested in publicly traded assets. The three most popular assets are stocks, bonds, and money market funds. They are typically considered safe, usually have some standard growth trajectory, and provide decent liquidity. As such, these standard investments have become the bread and butter of most brokerages.

That being said, there has always been a pressure to expand offerings. It’s a big world out there, and there is a lot of investment potential in the private arena. Self directed investors realized this early and have often gone the private route. Popular self directed assets include private real estate and start-ups. However, the government has never allowed the brokerages to pursue these kinds of assets.

Until now.

Louis Campagna is the Chief of the Division of Fiduciary Interpretations in the Office of Regulations and Interpretations. That means he is allowed to offer an opinion on what brokerages can offer retirement investors. And this week he sent out a letter that did exactly that.

Mr. Campagna was asked by Pantheon Ventures and Partners Group about the possibility of including private equity investments in individual account plans that are subject to ERISA. In other words, can they move your 401k slightly off Wall Street and get it into something that is not publicly vetted? He answered in some beautiful legal language (you can read the DOL letter here) that if the brokerage is acting responsibly, then yes. In his words, “The Department believes that a plan fiduciary of an individual account plan may offer an asset allocation fund with a private equity component of the type you describe in a manner consistent with the requirements of Title I of ERISA.”

The letter then details specific fiduciary elements of these investments that should be considered. They include:

  • Liquidity – Private assets often have longer time horizons which might not fit the goals of a retirement plan. Whatever assets are chosen must possess sufficient liquidity to fit investor goals.
  • Oversight – The asset should be overseen by a plan fiduciary or by an investment professional who has the capability and experience to do so.
  • Fees – Private assets often rack up a tremendous array of fees. The potential profit for the retirement investor can not be significantly lost to the fees.
  • Information – Investors need to be informed (and understand!) regarding the kinds of assets that they are purchasing.

All in all, this is a revolutionary expansion and could potentially change the face of retirement investing. Imagine a world where there is free asset choice and the stock market is not the end-all of investing. Your IRA would certainly look different. Whether that’s for the good of your IRA (or not) is a different question.

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