The U.S. Government Accountability Office on Tuesday released a report recommending the Department of Labor collect data and issue guidance on the use of private equity investments in 401(k) retirement plans.
Private equity options are expected to grow in 401(k) plans, but little is known about how much is currently invested or how the information is communicated to participants and plan sponsors, according to the report.
The GAO reviewed research on private equity funds and found no consensus on their performance compared to publicly traded equity. Some papers found private equity outperformed public equity, though one paper’s benchmarks did not account for the excess return experts believe should justify higher risks. Other papers found private equity underperformed public equity when accounting for fees, which can be higher for private equity, and underlying risk.
Private equity is an alternative asset that differs from traditional investments like mutual funds in its disclosures, who can invest, and valuation methods, the GAO said. The agency also found no consensus on how to effectively benchmark private equity performance, noting that mutual funds must use a broad-based securities market index, while private equity research uses various public and custom indexes.
The report recommends the Labor Department’s Employee Benefits Security Administration issue guidance to help plan sponsors and participants understand the differences between private equity and public market investments, such as liquidity and valuation. The GAO also recommended the agency gather data on how much 401(k) money is held in private equity via underlying assets.
The Labor Department neither agreed nor disagreed with the recommendations, according to the report.