WASHINGTON — An ongoing Department of Labor investigation into how corporate pension plan fiduciaries are valuing alternative investments is aimed at ensuring that fiduciaries meet their obligation to ensure that plan investments are prudent, said the director of enforcement for the department's Employee Benefits Security Administration.
“It would be difficult, if not impossible, for a fiduciary to fulfill these fiduciary responsibilities if the fiduciary lacked correct information concerning the value of a plan's assets, including hard-to-value assets such as real estate holdings, private equity funds, limited partnerships and closely held employer stock,” said Virginia C. Smith, the enforcement director, in testimony before an ERISA Advisory Council working group on Sept. 11 in Washington.
In the text of her remarks to the working group, Ms. Smith also said EBSA currently has “several regional enforcement projects” under way looking into plan valuations of investments in real estate, collectibles, hedge funds, limited partnerships and distressed investments.
“Generally, investigations conducted under these projects include a review of the process used by the plan fiduciaries to evaluate the fair-market value of any hard-to-value assets held by the plan,” she said.
Ms. Smith also said that as of Sept. 11, EBSA's voluntary fiduciary correction program had received 12 applications involving “improper valuations.”
The VFCP program, according to Ms. Smith, encourages plan officials to “self-identify and correct” violations of the Employee Retirement Income Security Act of 1974.
“The hard-to-value assets are generally real estate, often vacant land,” Ms. Smith said in the text of her testimony. “Correction includes properly valuing the asset and making an additional payment to any participant or beneficiary who received too little because of an asset that was undervalued,” Ms. Smith continued. “As the issue of hard-to-value assets becomes more widely recognized as a potential violation, we expect to see an increase in the number of VFCP applications involving this transaction.”
Ms. Smith's testimony does not explain how plan fiduciaries are supposed to properly value their alternative assets on their annual Form 5500 filings with the DOL. But according to a July 1 investigatory letter from the DOL's Boston regional office, plans should have a process in place to independently value alternative assets (Pensions & Investments, Aug. 18).
“A process which merely uses the general partner's established value for all funds without additional analysis may not insure that the alternative assets are valued at fair market value,” said the letter, signed by James Benages, director of the DOL's Boston regional office.
“She (Ms. Smith) is basically saying that she's leaving it to the regional offices to deal with the hot-button (valuation) issues that are emerging locally,” said Andrew Oringer, an ERISA lawyer with White & Case LLP, New York. “I'm particularly concerned about enforcement activity, which is not run off a national platform, where that enforcement activity implicates fundamental policy concerns.”