Last June, the Department of Labor (DOL) issued an Information Letter sanctioning the use of private equity investments in asset allocation vehicles offered in defined contribution (DC) plans.
The Information Letter addressed concerns with offering private equity in DC plans—the complex organizational structure, potentially higher fees, illiquidity and complexity of valuations, among other things—with five paragraphs detailing considerations for plan fiduciaries in evaluating and monitoring the investments.
Now, the Defined Contribution Alternatives Association (DCALTA) has published a practical framework to provide plan sponsors clarity on the implementation of daily valuation of private assets. In its white paper, “Daily Valuation of Alternative Assets in DC Plans,” the association suggests a framework with procedural, quality management and governance components. It further explains that:
- Daily valuation and pricing can be achieved using an existing approach and in accordance with accounting and legal requirements;
- Technical issues such as reporting lag, valuation accuracy and dilutive effects can be handled systematically and fairly; and
- Existing audit pathways remain intact, i.e. valuation remains tethered to the net asset value (NAV) reported by the direct manager.
“The framework encompasses 11 positions grounded in principles of fair valuation, ISO [International Organization for Standardization] quality management and effective governance,” says Sheridan Porter, DCALTA member and co-founder of valuation technology firm FEV Analytics. “These elements are important for retirement savers and plan sponsors to have confidence that the procedure used to value these private assets is fair and robust.”
The DCALTA white paper can be accessed from here.