This is a very nice, well-balanced article by Kellie Mejdrich of Law360 on the question of adding private equity investments into 401(k) plans. I am quoted in it not so much as a naysayer on the idea, but more on the need for a little bit of skepticism and caution on the idea. To be clear, I don’t think the case has been made yet for fiduciaries to sign off on adding private equity investments, particularly in the form of a holding within a target date fund, to the 401(k) plans for which they are legally liable. Fiduciaries – and I to be less skeptical– need to see models, math and projections that show doing so will improve returns for participants even after accounting for cost issues. This is not what we have been seeing to date, which has instead basically been sloganeering about democratizing the financial markets. Unless I missed that part of the statute, ERISA doesn’t consider that to be part of the fiduciary obligation of plan sponsors, administrators, named fiduciaries and deemed fiduciaries.

I am not against adding private equity investments into plans, and, if anything, I am impressed by the work done by ERISA and fund lawyers to figure out how to do it. I am also wildly in favor of anything that actually improves outcomes for plan participants.

But any changes to plans that don’t improve outcomes, or instead make them worse, is a recipe for class action litigation against plan fiduciaries who sign off on those changes. Moreover, I am, by nature, education, training and 35 years in courtrooms, an evidence-based skeptic, and I need to see a factual basis for believing that adding private equity into the investment mix of 401(k) plans – in whatever form that addition takes – will lead to improved investment results for participants. In its absence, adding private equity investments into plans risks putting fiduciaries and their insurers at risk of looking up in a few years and finding they are facing a whole new wave of breach of fiduciary duty class actions, this time based on decisions to open 401(k) plans to private equity options.

When it comes to this change, I would caution plan sponsors and fiduciaries to “measure twice, cut once,” as the saying goes. Make sure the evidence backs up any changes they make in this regard – and don’t act until you have the evidence in hand to make a thoughtful decision.