For certain asset classes such as real estate, infrastructure, private equity, etc., ERISA restrictions make it difficult for the fund manager to carry out normal business activity of acquiring and managing assets.
When a fund manager is exempt from ERISA regulations
Fund can engage in complex transactions involving affiliates, such as:
Borrow money from affiliates to finance real estate transactions
Acquire investments made available to the fund by an affiliate in an off market transaction.
Use affiliates to manage underlying investment…common practice in real estate transactions.
Incentive fees can be paid to managers…common in real estate industry.
Fund can avoid unforeseen violations of ERISA regulations as well as administrative costs in determining whether or not every fund activity is permissible under ERISA.
ERISA exemption allows funds to be competitive in above asset classes and attract capital from pension plans as well as non-ERISA investors.
ERISA does not prohibit plan sponsors from investing in funds whose managers are exempt from ERISA rules.
Recent industry trends indicate an increasing number of real estate, infrastructure and private equity funds adopting the VCOC structure to achieve greater flexibility in conducting fund operations.
If a benefit plan sponsor invests plan assets in a fund subject to ERISA:
Plan sponsor retains fiduciary responsibility for investment strategy, asset allocation, prudent selection and monitoring of the fund manager.
If a benefit plan sponsor invests plan assets in a fund exempt from ERISA:
Plan sponsor has fiduciary responsibility for all investment selection.
When investing in ERISA exempt investments, Plan Sponsors can protect themselves through prudent asset allocation decision, provisions in the Investment Manager Agreement and regular monitoring of manager performance.