Getting Out: Measuring Your Benefit Plan’s Investment Liquidity

Jason Edwards, CPA

Since the onset of the financial crisis in 2008, employee benefit plan trustees are as focused as ever on asset preservation. We hear them asking “How do I obtain the best return on investment, while protecting the plan’s assets from market decline.  This is a great question and one that certainly merits concern. There is, however, yet another factor you should also consider that carries equal or greater weight: liquidity.

Alternative or non-traditional investments are becoming mainstream as plans juggle portfolios that balance the characteristics of risk and return.  While alternative investments may provide that ideal mix, many also come with a significant limitation – restriction on redemption.  By contrast, traditional investments (stocks and bonds) are relatively liquid and can be sold on-demand in the open market — enabling a quick and inexpensive conversion to cash.

Common redemption restrictions include:

  1. Advance notice of intent to withdrawal
  2. Number of withdrawal requests in a given period of time
  3. Available cash within the investment fund
  4. Other investment funds are closed-ended and don’t permit redemptions until the fund’s investments are liquidated.

Such restrictions require you to project future cash flow needs — near-and-long-term — to ensure that assets (some of which may be tied up for years) are sufficiently liquid to meet benefit obligations and cover administrative costs.  These estimated needs vary based on circumstances from plan to plan and should be evaluated by yourself, plan management and the plan’s professionals.

So how do you know if an investment’s liquidity is encumbered?  The details of any redemption restrictions are usually found in few places, including:

  1. The investment agreement/contract
  2. The prospectus or other offering materials
  3. In the footnotes of the investment fund’s audited financial statements
  4. The manager of the investment fund
  5. Your plan’s investment consultant (if you retain one) should also be able to research and explain any restrictions on potential investment opportunities or on investments currently in the plan’s portfolio

Any significant redemption restrictions will require disclose in the footnotes to the plan’s audited financial statements.

As your plan looks to maintain property liquidity levels, consider alternative investments to see if they are a good fit for your plan.  However, be sure to always review any restrictions on redemption and work with your plan’s investment manager to regularly assess and update your plan’s investment strategy to meet your unique needs.

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