Alternative Assets in Qualified Plans – Rea CPA

Alternative Assets in Qualified Plans

As a retirement plan administrator, plan fiduciaries often consult me about different investment vehicles. They ask if they can invest plan assets in investment classes beyond the traditional stocks, bonds and mutual funds and include investments like limited partnerships or real estate in their portfolios. The answer isn’t always clear, but as with many fiduciary questions, we can turn to the Department of Labor for guidance.

Trustees of qualified plans are considered fiduciaries, a term which comes with special significance and accountability. Fiduciaries have important responsibilities including:

  • Acting solely in the interest of plan participants with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently;
  • Following plan documents;
  • Diversifying plan investments; and
  • Paying only reasonable plan expenses.

Under the Employee Retirement Income Security Act (ERISA), the plan and its fiduciaries are also responsible for the timely valuation of alternative investments. This is necessary to comply with formal reporting requirements to both plan participants and the government. With certain alternative investment classes, this can become a problem if fair market value is not readily ascertainable. There are two reasons for this problem.

First, who can the plan fiduciary rely upon to ascertain the value of the alternative investments when there is no publicly traded market value?

  • Investment managers?
  • Trustees?
  • Plan administrators?
  • Custodians?
  • Independent valuation experts or appraisers?

Relatedly, what is an appropriate cost for the assertion of asset value? If plan assets are not properly and timely valued, participants may dispute the valuation; this could create considerable legal liability and exposure for the plan sponsor. A related concern is determining the appropriate cost of ascertaining asset value. In this, plan fiduciaries’ need to consider their obligation to pay only reasonable plan expenses.

A second problem affects only smaller plans. If a plan has fewer than 100 participants, plan sponsors are permitted to file a simplified Form 5500-SF. This allows the plan to avoid the annual financial audit requirement, which can cost several thousand dollars annually. However, in order to qualify for this simplified filing and avoid an audit, the plan must be at least 95% invested in assets with a readily determinable fair market value. Stocks, bonds and mutual funds are examples of assets that are generally considered to fall into this category.

For these reasons, it is generally recommended that plan sponsors steer clear of alternative investments in their qualified plans. Alternative asset classes are much more suitable for personal investments which are held outside of a qualified plan where there are no fiduciary responsibilities or potential liabilities.

Help for Ohio Pension Plan Fiduciaries

Being a pension plan fiduciary is a hard job. With lots of rules, heavy responsibilities, and many ethical quandaries, fiduciaries can often feel overwhelmed by the demands of the role. Being a retirement plan administrator can be a heavy burden, but you don’t need to bear it alone. If you need help doing your fiduciary duty, contact Rea & Associates. Our Ohio retirement plan services team can provide you with a wide range of fiduciary assessment and consulting services to lighten your burden.