The EDHEC Infrastructure & Private Assets Research Institute (EIPA) has submitted detailed comments to the US Department of Labor on Fiduciary Duties in Selecting Designated Investment Alternatives (RIN 1210-AC38).
As private market access continues to expand, ensuring that investment decisions are supported by credible, comparable and evidence-based measures remains essential for long-term investor protection and sound fiduciary oversight.
In its comments, EIPA highlights the importance of robust valuation practices, transparency, risk measurement and governance frameworks when assessing private market investments.
Key points of EIPA’s comments include:
On Valuation: General
The proposal’s reliance on ASC 820 and emphasis on a conflict-free, independent valuation process are an important and necessary foundation, consistent with broader supervisory expectations. We discuss these supervisory expectations in greater detail in the supplemental policy paper submitted as an appendix to this letter: Private Asset Valuation: Comparative Regulatory Briefing. But functional independence is only one pillar of a credible valuation framework; fiduciaries also need sufficient transparency around key assumptions, sensitivity to plausible changes in those assumptions, and the range of valuation uncertainty to assess comparability and decision-usefulness. We therefore recommend the Department consider requiring, as part of the safe harbor, that valuation representations include disclosure of key assumptions, at least one sensitivity analysis showing how values shift under plausible changes to those assumptions, and a stated range of uncertainty. This would not add significant burden but would meaningfully distinguish robust valuation from procedurally compliant but economically thin assessments. It would also improve comparability across managers and vintages, which benefits fiduciaries making selection decisions.
On Valuation: Continuation Funds
In example (j)(4), the standard suggests that a fiduciary would have to establish that any potential conflict of interest would not render the designated investment alternative’s valuation inaccurate. The conclusion is that the fiduciary would not be able to satisfy this standard. We agree with this point of view but this could be extended to all investment alternatives that may hold interests in continuation funds. Diversified private asset funds that pursue secondary interests often have exposure to continuation funds. The ruling should clarify whether this conclusion applies only to direct interests in continuation funds, or whether it extends to all continuation fund exposure, including indirect positions obtained through diversified private asset funds.
On Risk
The performance factor in paragraph (g) appropriately references risk-adjusted returns, and the example helpfully cites the Sharpe Ratio. We recommend the Department acknowledge in guidance that standard volatility measures, including the Sharpe Ratio, may systematically understate risk in private assets due to appraisal smoothing of returns. Fiduciaries relying solely on reported volatility metrics for private infrastructure, PE, or private debt may be comparing against an artificially favorable risk profile. Additionally, appraisal smoothing may understate correlations with listed asset classes, overstating diversification benefits. We suggest the Department encourage, without mandating, that fiduciaries also consider downside scenario analysis and liquidity stress testing as part of the performance and liquidity factors. The derivatives guidance from 1996 already established this precedent for complex instruments and could be referenced here.
In Table 3 – “Peak to Trough Drawdowns of Asset Class Indices in Select Periods”, the fiduciary should understand that one is comparing modeled appraisal valuations for private assets with market base pricing for listed assets. The results may be materially misleading.
For example, the drawdown during the Covid-19 pandemic shows Private Equity, Private Debt, and Real Estate down 8.5%, 6%, and 3.5%, respectively. The drawdown of global markets was 22.1% and high yield bonds 13.8%. These results may imply valuation errors and smoothing rather than downside protection. See our paper on valuations.
On Benchmarking and Alpha
The meaningful benchmark definition in paragraph (k) is well-constructed and the composite benchmark example for PE in (k)(2) is helpful. We recommend the Department add brief guidance noting that when benchmarking private assets, fiduciaries should be aware that reported returns may reflect illiquidity premia, leverage effects, and smoothing rather than manager skill alone. This does not require prescribing a specific methodology, but flagging the issue encourages fiduciaries to ask the right questions of their advisers. It also guards against the risk that flexible custom benchmarks are used in ways that inflate apparent outperformance. The use of a public market equivalent, mentioned in (k)(2), affords significant latitude in selecting an index for the calculation. For example, a large cap index like the S&P 500 may give a very different result than a private equity index, global index such as MSCI ACWI, or a small cap index (Russell 2000 or SP 600). Fiduciaries should understand why an index was chosen and whether it captures the systematic risk of that market.
On the Interaction between Valuation and Benchmarking
This is a point the rule does not currently address. Because performance benchmarks for private assets are typically built on NAVs, and NAVs are themselves model-based, procedural compliance on valuation and benchmarking simultaneously can still produce misleading performance comparisons. We recommend the Department add a brief acknowledgment of this compounding effect and encourage fiduciaries to consider whether their benchmarking process is sensitive to valuation methodology choices made by the manager.
On Complexity and Fees
In l(1), the example discusses fees for private assets, which often include management fees and variable based performance fees. In specifying whether a plan fiduciary has met the comprehension requirements of paragraph (l), two scenarios are provided to meet the standard. We suggest that in (A), that the average total expected rate of the designated investment alternative’s fees should be expanded to include all fees paid directly or indirectly by the plan. This would include not only fees paid to the fund manager, but all fees, management and variable, paid to the underlying fund interests held by manager. This would apply to fund of funds or funds that are acquiring secondary interests. When combined, the total fee load for the participant may be significantly higher than the headline fee. See our paper for more details on fees.
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📥Full submission letter: Comments on Proposed Rule — Fiduciary Duties in Selecting Designated Investment Alternatives (RIN 1210-AC38).
📥Supplemental policy paper submitted with the comments: Private Asset Valuation: Comparative Regulatory Briefing.
