The EDHEC Infrastructure & Private Assets Research Institute (EIPA) has submitted detailed comments to the House Financial Services Subcommittee on Capital Markets regarding the potential inclusion of private market investments in 401(k) and other retirement vehicles. EIPA’s analysis underscores that while private equity can offer significant diversification benefits, it also introduces complex risks that require robust safeguards to protect individual retirement assets.

“While including private equity in the asset mix can enhance diversification, it differs markedly from public markets in performance measurement, valuation, benchmarking, fees, and liquidity-requiring meaningful improvements to ensure its suitability for individual retirement plan participants,” said Evan Clark, Senior Private Market Analyst at EIPA.

Key points of EIPA’s comments include:

• Investment Structures:
  Only select private equity avenues-such as fund partnerships or evergreen structures-may be appropriate for defined contribution plans. Direct investments in private companies are deemed impractical for individual plan participants due to the complexities in achieving proper diversification and risk assessment.

• Valuation and Risk Management:
  Private equity investments differ substantially from public markets. Infrequent pricing can lead to outdated valuations, understate risk, and mislead investors about performance. EIPA calls for more frequent valuation practices and clearer disclosure of risk metrics.

• Fiduciary Responsibilities and Transparency:
  To protect retirement savers, there must be full disclosure regarding fees (including management fees and carried interest), benchmarks, and potential conflicts of interest. These measures are essential for ensuring fiduciaries can effectively manage the inherent risks of illiquid and complex private market assets.

• ERISA Compliance:
  All recommendations are framed within the context of the Employee Retirement Income Security Act (ERISA). EIPA stresses that any expanded access must maintain compliance with ERISA standards to ensure that the fiduciary duty to plan participants is not compromised.

• Policy Guidance and Industry Evolution:
  Building on guidance provided by the Department of Labor in June 2020 and December 2021, EIPA highlights that while private equity has grown as an asset class, its operational practices need to evolve. This includes adopting standardised performance metrics and robust risk management frameworks to protect investors in 401(k) plans.

EIPA’s submission underscores its commitment to broadening retail investor access to private markets while ensuring that enhanced diversification does not compromise the protection of retirees’ assets.

The full submission letter can be found here: EIPA Comments to the House Financial Services Subcommittee on Capital Markets.