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Ext. PublicationAlternative Assets in Retirement Plans: A Compliance View for Private Funds
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A recent executive order directed the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) to revise regulatory guidance to allow defined-contribution plans, including 401(k)s, to invest in a broader range of alternative assets. These include private equity, private credit, real estate, hedge funds, infrastructure, commodities and digital assets such as cryptocurrency.
While the initiative is intended to enhance diversification and long-term return potential for retirement savers, it introduces new compliance and fiduciary considerations for registered investment advisers (RIAs) and private fund managers.
Regulatory
The executive order does not change existing law but instructs regulators to explore ways to integrate private market investments into retirement plans. Key focus areas include:
- Clarifying fiduciary standards for plan sponsors and advisers evaluating alternative assets
- Developing safe harbor provisions to guide the inclusion of private equity and other alternatives in diversified investment vehicles such as target-date funds
- Improving transparency and disclosure to ensure plan participants are adequately informed about the nature and risks of these investments
Implications for RIAs and Private Fund Managers
Expanding retirement plan access to alternative assets could open valuable new channels for RIAs and private fund managers. The potential capital inflows are significant as are the demands for governance, transparency and operational readiness. Firms will need to consider both opportunities and challenges as the market evolves.
Opportunities
- Access to retirement capital: Defined-contribution plans represent a significant pool of long-term capital. Private funds may benefit from increased inflows if integrated into retirement plan offerings.
- More investment choices: Including private funds in retirement plans gives investors more ways to grow their savings beyond traditional stocks and bonds.
- Long-term investment alignment: Private equity and infrastructure investments often match the long-term horizon of retirement accounts, potentially improving portfolio stability.
- Market expansion: Fund managers may find new distribution channels and client segments by adapting offerings to meet retirement plan requirements.
Challenges
- Fiduciary oversight: RIAs need to help ensure that their private fund offerings meet ERISA standards for prudence, diversification and cost effectiveness.
- Liquidity and valuation: Many private equity structures involve long lock-up periods and complex valuation methodologies, which may not align with the liquidity needs of 401(k) plans.
- Fee transparency: Private funds typically involve layered fee structures. RIAs must ensure clear disclosure and justification of costs to plan sponsors and participants.
- Operational complexity: Integrating private funds into retirement platforms may require changes to reporting, custody and participant communication processes.
- Regulatory scrutiny: Increased attention from the SEC and DOL may lead to evolving compliance expectations, requiring ongoing monitoring and program updates.
Compliance Considerations for Private Funds
Successfully participating in this expanded retirement plan market demands disciplined compliance. Private funds should take a fresh look at policies, disclosures and operational safeguards to help ensure alignment and readiness for regulatory review. From marketing materials to valuation procedures and investor communications, it’s critical to consider:
- SEC registration and reporting: Form ADV and related disclosures must accurately reflect fund structure, fees and investment strategies.
- Marketing and distribution: Materials targeting retirement plans should comply with SEC and DOL advertising rules, including balanced presentation of risks and performance.
- Operational controls: It’s important to implement robust compliance programs to monitor liquidity, valuation and investor communications, especially when interfacing with ERISA-covered plans.
- Policy and procedure updates: Firms should review and update internal policies to reflect new distribution channels and investor types.
- Testing and monitoring: Ongoing testing of controls and monitoring of fund activity will be essential to meet fiduciary and regulatory expectations.
Key Takeaways
The executive order signals a potential shift in retirement investing, with private equity and other alternative assets poised to play a larger role in defined-contribution plans. For RIAs and private fund managers, navigating this evolving landscape will require thoughtful compliance planning, transparent communication and alignment with fiduciary standards.
As regulatory guidance develops, firms should proactively assess their infrastructure and ensure they are prepared to meet the expectations of both regulators and retirement plan participants.
Weaver’s dedicated Asset Management Consulting and Compliance Services practice supports advisers in navigating the evolving regulatory landscape. We’re here to help ensure your compliance program remains effective and adaptable with support for your policy review, testing, monitoring, communication and training.
Contact us today.
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