DOL OIG Raises Valuation Concerns Over Alternative Investments by Retirement Plans

October 10, 2013 | Banking & Financial Services


May a fiduciary for a retirement plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) rely on the valuation provided by the general partners of alternative investments, such as private equity funds, or the plan’s professional investment managers? Such is commonly the practice. According to the Office of the Inspector General of the U.S. Department of Labor, however, the answer should be “No.”

On September 30, 2013, the OIG issued a report recommending that the Department enact regulations providing that such reliance could be a fiduciary breach under ERISA. Reporting that as much as $1.1 trillion of the estimated $6.5 trillion in retirement plan assets are invested in hard to value assets (assets that do not trade in an established market), OIG’s report takes the Department to task for not requiring that fiduciaries be required to have an established process to determine the fair market value of alternative investments, and to maintain written documentation relating to the fair market value of those investments. Such a position was taken by the Department’s Boston Regional Office in 2008, according to the OIG, and the report urges the Department to formalize it in a regulation.

In its formal response to the report, the Department declined the OIG’s suggestion, characterizing the issue as “case specific” and not meriting any specialized guidance. Instead, the response emphasizes that “investments in alternative investments that are hard to value are subject to the fiduciary responsibility rules in the same manner as are any other plan investments.” Moreover, the Department’s response to the OIG notes the difficulty of providing relevant guidance, given “the great variety of alternative investments.” The response also takes issue with the OIG’s statistics, stating that the amount of plan assets that raises meaningful valuation concerns is likely to be a fraction of the $1.1 trillion cited by the OIG.

The Department’s response to the OIG’s concerns suggests that specialized guidance on fiduciary processes for valuing alternative investments will not be forthcoming. At the same time, however, as the report notes, the Department has established alternative investment projects in several regional offices. According to the report, the Department has commenced a number of investigations into plan investments in hard-to-value assets, indicating that its attention to valuation issues on a case-by-case basis will continue in the absence of further guidance.

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If you would like to discuss this matter further, please contact Shannon Barrett at (202) 383-5308, Brian Boyle at (202) 383-5327, Gregory Jacob at (202) 383-5110, Theresa Gee at (202) 383-5395, or your primary contact at O’Melveny & Myers LLP.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Shannon Barrett an O'Melveny partner licensed to practice law in the District of Columbia and Illinois, Brian Boyle, an O'Melveny partner licensed to practice law in California and the District of Columbia, Gregory Jacob an O'Melveny partner licensed to practice law in the District of Columbia and Virginia, and Theresa Gee, an O'Melveny counsel licensed to practice law in California and the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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