I have been writing about Private Equity not meeting the criteria for exemptions from being classified as Prohibited Transactions in ERISA plans. https://commonsense401kproject.com/2025/01/01/private-equity-in-401k-plans-a-fiduciary-minefield-for-plan-sponsors/  I haven’t received negative feedback from the industry, nor much input from those in financial transparency.  

---

⚖️ 1. Why It Should Be a Prohibited Transaction

Private Equity products often:

• Charge high, opaque fees (violating the reasonable compensation prong),
• Rely on complex, non-transparent disclosures (violating the no misleading statements prong),
• Are marketed by non-fiduciary parties (violating care and loyalty obligations),
• Fail to accept ERISA fiduciary status in the PE offering documents, disclaiming responsibility.

This makes them vulnerable on all four elements of the Impartial Conduct Standards, which apply to the DOL’s Prohibited Transaction Exemption (PTE) 2020-02 that governs conflicts of interest.

So, on its face, allowing Private Equity into 401(k)s should be a prohibited transaction unless a strong exemption applies.

---

🧩 2. How PE Tries to Avoid Prohibited Transaction Classification

Despite these red flags, here’s how PE sponsors and platforms often try to thread the needle:

A. Structuring through Commingled Products

PE is typically offered via:

• Target Date Funds (TDFs) or
• Collective Investment Trusts (CITs)
  These are multi-manager, pooled vehicles in which PE is only a sleeve. The fiduciary responsibilities then shift to the TDF or CIT manager, who may be a fiduciary — but the underlying PE managers are not.

➤ This layering dilutes fiduciary clarity and avoids direct ERISA responsibility for the PE firms themselves.

B. Relying on the DOL’s 2020 “Information Letter”

The Department of Labor’s 2020 Information Letter (requested by Pantheon and Partners Group) did not bless PE in DC plans, but it did not ban it either. It merely said:

“…a plan fiduciary would not violate the duties of prudence and loyalty per se by including PE as a component of a diversified investment option.”

This gave cover — but did not offer an exemption or remove fiduciary obligations. Yet many sponsors are treating it as a green light.

C. Outsourcing Fiduciary Responsibility

Plan sponsors may rely on third-party investment consultants (e.g., Mercer, Aon, Callan) or TDF providers (e.g., BlackRock, Fidelity) and claim reliance on prudence of the delegated manager.

However, delegation does not absolve fiduciary liability under ERISA § 405 (co-fiduciary liability), especially if the sponsor fails to monitor the advisor or conduct due diligence on PE’s costs, liquidity, and performance opacity.

---

📉 3. Why This Still Fails Under the Impartial Conduct Standards

The Impartial Conduct Standards (ICS) were developed under the DOL fiduciary rule and carried into PTE 2020-02, which applies when there are conflicted recommendations (e.g., plan fiduciaries profiting from fund inclusion or relying on conflicted consultants).

Private Equity fails ICS because:

• Fees and valuation models are rarely benchmarked objectively.
• Performance data is not standardized (e.g., IRRs vs. time-weighted returns).
• Contracts often contain waivers of fiduciary duty, arbitration, or non-transparent fee disclosures.
• There is often no fiduciary warranty under ERISA by the PE provider.

This opens the door to prohibited transaction claims, especially if the PE recommendation:

• Directly or indirectly benefits the advisor/fiduciary financially.
• Lacks documentation of a prudent process.

---

⚖️ 4. What Would Trigger Liability

Plaintiffs could pursue claims under:

• ERISA §406(a) (dealing with conflicts of interest/self-dealing),
• ERISA §404(a) (fiduciary duties of prudence and loyalty),
• And potentially ICS violations under PTE 2020-02.

Courts and regulators could hold:

• Plan fiduciaries liable for imprudence or prohibited transactions,
• PE managers liable if they acted as de facto fiduciaries or benefited from self-dealing.

I think any plan sponsor who is pitched a Target date fund with any Private Equity, however small, to be wary.    Private Equity will sneak into Target Date Funds first, maybe at 5% then grow to perhaps 20% to increase fees.   BlackRock and Empower are cutting deals in which I believe they are getting lucrative fees from Private Equity in exchange for taking the fiduciary liability for the Private Equity in their target date funds.  I would think when looking at the Private Equity sleave, it would be a party in interest.   My contention is that if the Private Equity sleeve is a prohibited transaction, then the entire target date fund is a prohibited transaction.