New York, US; June 3, 2020
Partners Group welcomes guidance from US Department of Labor on inclusion of private equity in defined contribution pension plans
Partners Group, the global private markets investment manager, welcomes the US Department of Labor (DoL) guidance released on Wednesday in an Information Letter, which clarifies that under federal law, defined contribution (DC) pension plan fiduciaries can incorporate certain private equity strategies into diversified investment options, such as target-date funds.
The DoL guidance addresses an important hurdle for DC plan managers, who have to-date been reluctant to meaningfully incorporate private markets exposure into DC plans, including 401(k)s, for fear of non-compliance with their fiduciary duty under federal law. By contrast, defined benefit (DB) plans included in a 2019 survey of the US' 200 largest retirement plans had invested an average of 8.7% of their assets in private equity.
Robert Collins, Managing Director, Head of Partners Group's New York office, comments: "The Department of Labor has taken a major step toward modernizing defined contribution plans and providing participants with a more secure retirement. At a time when working families are struggling to save, this guidance gives fiduciaries the certainty they need to finally provide main street Americans access to the same types of high-performing, diversifying investments as wealthy and large institutional investors, all within the safety of their 401(k) plans."
Retirement industry research has shown the potential positive impact of private markets exposure on a plan participant's retirement income. According to a recent study from the Georgetown Center for Retirement Initiatives, including even a moderate allocation to private equity in a target-date fund could increase a full-career participant's annual retirement income by at least 6%, regardless of how the market performs. In addition, private markets provide valuable diversification in an investment portfolio in light of a shrinking public markets sector that has seen the number of US publicly-traded companies decline by around 50% since 1996.
Many in the retirement industry have advocated for greater parity between the investment options available to DB and DC pension plan investments. In 2017, Partners Group launched an initiative to seek new guidance from the DoL, in which it partnered with Pantheon, another private markets investor. These efforts were supported by a broad coalition of investor-oriented groups, including DC plan associations and many of the US' largest public and corporate pension plan sponsors.
The illiquid structure of traditional, closed-end private equity vehicles renders them incompatible with the US DC pension system, which prefers all underlying fund allocations to provide daily liquidity and pricing and highly standardized purchase and redemption procedures. In 2015, after establishing a 14-year track record of managing private markets programs with liquidity features, Partners Group continued its leadership in the US private wealth market by becoming the first firm to manage pension assets in a private equity offering structured specifically to meet these requirements. Partners Group's private equity offering for the US DC market is designed to be adopted by professionally-managed or advised DC plans and incorporated in structures such as target-date funds.
The DoL specifically names Partners Group's DC offering in its Information Letter as an example of a private equity investment product "designed to be used as a component of a managed asset allocation fund in an individual account plan." To-date, the majority of private markets firms still lack the capabilities to structure a fund which meets the DC system's requirements.
David Layton, Partner, Co-Chief Executive Officer, Partners Group, adds: "The growth in the proportion of US retirement assets held within DC plans has led pension plan managers to demand access to a broad set of diversifying investment options, suited to the long-term investment horizons of many plan participants. With the clarity now provided by the DoL, we expect many of the larger private markets managers will also focus on developing the capabilities to build products that meet the specific requirements of the DC market. Ultimately, we believe that DC plans will over time adopt similar asset allocations to DB plans, incorporating private markets as a key performance driver."