DOL Concern Over Alternative Investments in Pension Plans

Larry Beebe, CPA

Utilizing alternative investments in employee benefit plans, particularly pension plans, is a common practice. However, as more and more plans have invested assets in these types of investments, the Department of Labor (DOL), in a recently-released audit report (PDF), is expressing some concerns about the use of alternative investments in pension plans.

What are Alternative Investments?

The American Institute of Certified Public Accountants defines alternative investments asAlternative_Investments_360 assets that are not listed on any exchanges or over-the-counter markets, or for which quoted market prices are not available from sources such as financial publications, the exchanges, or NASDAQ. Alternative investments can include:

  • Bank collective investment funds
  • Pooled separate accounts
  • Stable value investments
  • Private equity funds
  • Hedge funds
  • Real estate investment trusts
  • Funds of funds

In recent years, some pension plans have begun to diversify into a number of these investment options and strategies, as well as other hard-to-value in-kind assets. As of 2010, employee benefit plans had approximately $3 trillion invested in alternative investments; the Employee Benefits Security Administration (EBSA) estimates that hard-to-value assets compose between $800 billion and $1.1 trillion of this total.

DOL Recommendations for Alternative Investments in Pension Plans

The Office of Inspector General of the DOL conducted an audit in response to concerns expressed by the Internal Revenue Service, the Government Accountability Office, and the American Institute of Certified Public Accountants. There is concern that with lack of formal regulatory guidance, as well as the prevalence of limited scope audits, alternative investments put participants’ retirement funds at risk. The report’s recommendations for EBSA are as follows:

  • Propose and formalize guidance, and evaluate recommendations from the ERISA Council;
  • Improve procedures in enforcement reviews; and
  • Improve Form 5500 data collection, analysis and targeting.

In response, the EBSA stated that it believes that these assets pose no significant valuation concerns, ERISA currently provides sufficient guidance, and current Form 5500 investigation procedures are sufficient.

The Future of Alternative Investments in Pension Plans

While the EBSA agreed to consider these recommendations, it said that it believes the current system is sufficient, and there are currently no planned corrections. Your benefit plan can proceed as normal with alternative investments for the time being, but these assets will continue to be scrutinized. Per the report:

…plans are using poor practices in valuing these investments. Almost no plan administrator in our samples obtained an independent valuation or demonstrated an analytical process to determine the fair value of all their hard-to-value assets.

There are a number of issues to address when determining the fair market valuation of your alternative investments, and your plan auditor should work closely with you to ensure that they are accurately valued and disclosed.

For more details regarding this report, click here (PDF) to download the summary. The full report, EBSA Needs to Provide Additional Guidance and Oversight to ERISA Plans Holding Hard-to-Value Alternative Investments, can be found here (PDF).

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