EBSA should provide additional guidance to plans holding alternative investments, OIG says

The Labor Department’s Office of Inspector General (OIG) has issued a report recommending that the Employee Benefits Security Administration (EBSA) take action to provide additional guidance and oversight to ERISA plans holding “hard to value alternative investments.”

What OIG found

The OIG report found that EBSA has made efforts to improve its oversight of plans that hold hard-to-value alternative investments. Despite these efforts, however, the OIG said that EBSA must take further action to increase protections for participants and beneficiaries of plans investing in these types of investments.

Specifically, the OIG found EBSA had not formalized into regulatory guidance a requirement that plan administrators identify and adequately support the fair value of hard-to-value investments nor implemented the 2006, 2008, and 2011 ERISA Advisory Council recommendations on the same. As a result, plans are using poor practices in valuing these investments. Almost no plan administrator in OIG’s samples obtained an independent valuation or demonstrated an analytical process to determine the fair value of all their hard-to-value assets.

Plans can and have invested in unaudited alternative investments that self-report their asset values, the OIG noted. This provides no independent opinion of asset values, and effectively no assurance that the assets in question even exist, the report said. Additionally, the OIG noted that even audited fund values reported by alternative investment entities may not always translate into fair value for the plans because of complex factors such as illiquidity of ownership interests and other considerations. “Compounding this problem,” the report said, “is the fact that plan administrators have increasingly used limited scope audits, in which plan auditors do not test for existence or valuation of plan assets in certain cases.” In 2010, approximately $3 trillion in assets received only a limited scope audit.

Finally, the OIG report found that EBSA could improve procedures in enforcement reviews and Form 5500 reporting, data collection, and targeting for plans with hard-to-value alternative investments. EBSA has previously stated that in light of the challenges facing retirement plan fiduciaries and investors, such as Ponzi schemes and hard-to-value assets, participants need protection from potential losses.

OIG recommendations

The OIG recommended the Assistant Secretary for Employee Benefits Security take the following actions for plans holding hard-to-value alternative investments: (1) propose and formalize guidance and evaluate the ERISA Council recommendations, (2) improve procedures in enforcement reviews, and (3) improve Form 5500 data collection, analysis, and targeting.

EBSA response

In response, EBSA stated that it did not believe the trillions of dollars of plan assets invested in alternative investments and hard-to-value assets pose significant valuation concerns, that ERISA already provided sufficient guidance, that its investigative procedures were sufficient, and that the Form 5500 already focuses on asset valuation. EBSA agreed to further consider the OIG recommendations, but did not provide any explicit corrective actions.

Source: U.S. Department of Labor, Office of Inspector General – Office of Audit, Report No. 09-13-001-12-121, September 30, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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