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Alternative Investments for ERISA Plans Toolkit
Resources to assist employers and other fiduciaries of employee benefit plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code) with alternative plan investments.
A fiduciary of an employee benefit plan ( www.practicallaw.com/6-502-2678) governed by the Employee Retirement Income Security Act of 1974 ( www.practicallaw.com/0-382-3434) (ERISA) and the Internal Revenue Code ( www.practicallaw.com/2-382-3555) (Code) investing ERISA plan assets in any type of investment must consider its fiduciary duties under ERISA to plan participants and beneficiaries, both regarding the investment decision-making process and the decision to invest.
These considerations multiply when investing ERISA plan assets in alternative investment vehicles, such as:
Real estate investment funds.
This is primarily due to the "look-through" rule of the Department of Labor ( www.practicallaw.com/2-501-6354) (DOL) plan assets regulation, as modified by ERISA Section 3(42) (29 U.S.C. § 1002). Under this rule, unless an exception applies, the assets of a plan that acquires an equity interest in an entity is deemed to include both:
The equity interest of the entity.
An undivided interest in the entity's underlying assets.
This means that a hedge fund, private equity fund or other collective investment vehicle or issuer that is not itself a plan subject to ERISA may be treated as holding assets of the investing employee benefit plans and:
Individuals or entities with discretion to manage and control the entity's assets, or who provide investment advice for those assets, such as an investment manager for a private equity fund, are considered ERISA fiduciaries to each of the plans investing in the entity.
The transactions entered into by the entity and the compensation arrangements of the investment manager or general partner, or both, of the entity are subject to the prohibited transaction provisions of ERISA and Code Section 4975.
The entity is treated as a benefit plan investor itself when it invests in a second entity, such as in a feeder fund arrangement.
The indicia of ownership of the entity's assets must be held in the US, subject to exceptions.
The investment manager must disclose in advance of the plan's investment the compensation it will receive and provide certain investment information to the plan.
In addition, these types of alternative plan investments may be subject to the terms of limited partnership and side letter agreements that may conflict with the requirements of ERISA and the Code.
In light of these legal issues, plan fiduciaries must carefully evaluate the procedural and substantive requirements for alternative plan investments under ERISA.
This Toolkit is a collection of resources to assist employers and other fiduciaries of employee benefit plans governed by ERISA and the Code with alternative plan investments.