The Department of Labors regional office in Boston is investigating how corporate pension plan fiduciaries value their alternative investments.
The result could be a huge increase in expense and work for plan fiduciaries.
Pension plans often rely on the financial statements of general partners to report the value of those investments in their Form 5500 annual filings with the DOL.
But in at least one letter to an unidentified pension plan, James Benages, director of the DOLs Boston regional office, contends that plan fiduciaries need to have a process in place to independently value the alternative assets.
In the July 1 letter, Mr. Benages said the plans failure to have an established process by which the fair-market value of alternative investments can be determined violates the Employee Retirement Income Security Act and, if not changed, could prompt a lawsuit against the plan.
A process which merely uses the general partners established value for all funds without additional analysis may not insure that the alternative assets are valued at fair market value, the letter said.
The copy of the letter obtained by Pensions & Investments had all information that could be used to identify the plan sponsor deleted.
Among other things, the DOL letter recommended that executives at the plan consider re-filing the 2007 5500 form so that it accurately reflects the fair market value of these investments.
If you take proper corrective action, then the department will not bring a lawsuit with regard to these issues, said the letter, signed by Mr. Benages.
In a telephone interview, Mr. Benages said he would not comment on the ongoing investigation, or what spurred it. Its a normal investigation, he said, but added, A number of plans are affected.
Investment consultants said the changes in asset valuation endorsed by the DOLs letter could create an enormous new workload and expense for plan executives and their staffs.
While most pension plans do rely on the financial statements of the general partners in their investment partnerships, those financial statements are usually audited, pension consultants said.
Custodial banks that hold the investments for the plans can also question valuations that dont make sense, the consultants added.
Although Mr. Benages letter does not spell out exactly how he believes pension plans should be doing independent valuations, the process could require plans to hire appraisal firms, investment banks or new in-house staffers with appraisal expertise, consultants said.
It would be extremely onerous and unproductive if every limited partner had to perform their own audits, said Joe Nankof, partner with Rocaton Investment Advisors LLC, Norwalk, Conn.
It will be a big mess, added David Fann, president and chief executive officer of PCG Asset Management LLC, La Jolla, Calif. (PCG Asset Management is the consulting and private equity fund of funds subsidiary of holding company, Pacific Corporate Group LLC.)
Requiring plans to do their own valuations could discourage plan investments in alternatives. It would be a huge disincentive because the costs of trying to establish or administer this kind of program would be prohibitive, he said.
Mr. Fann said that the average private equity fund has five to 20 investments, while his firms average pension plan client is invested in between 50 and 200 alternative investment partnerships. It would be virtually impossible for any plan sponsor to undertake an independent valuation of an investment portfolio on their own, he said.
He also said that general partners in hedge funds and other alternative investment strategies are reluctant to share details about their underlying investment positions for competitive reasons. Mr. Fann added that investment agreements often preclude the disclosure of specific investment information to plans because general partners are concerned that the sensitive competitive information could otherwise become public.
This is an extremely complex issue that should not be resolved by ad hoc enforcement actions, said A. Richard Brick Susko, an ERISA attorney with Cleary Gottlieb Steen & Hamilton LLP, New York.
The problem is the plans themselves arent equipped with the resources to grapple with what the DOL is suggesting they do, Mr. Fann said.