Plan assets

Plan assets is a concept under the feared but respected Employee Retirement Income Security Act which strikes terror into the heart of investment managers, and a shiver of tense but almost orgasmic excitement down the spine of an ERISA lawyer. The same sort of sensation normal peope get watching that closing scenes of Silence of the Lambs.

The concern is concern over the U.S. Department of Labor’s “plan asset regulations” which determine a fund's assets will be treated as held directly by an ERISA plan investor for the purposes of ERISA and the Internal Revenue Code of 1986.

===ERISA representations and prohibited transactions=== Even a non-US manager might be invited to make this sort of a representation:

No ERISA Funds. The Fund’s assets do not include “plan assets” within the meaning of Section 3(42) of ERISA, and Party B is not otherwise subject to Title I of ERISA or Section 4975 of the Code.
Definitions. Section 14 is hereby amended to include the following definitions in their appropriate alphabetical order:

“Code” means the U.S. Internal Revenue Code of 1986, as amended, or any successor statute.

“ERISA” means the U.S. Employee Retirement Income Security Act of 1974, as amended, or any successor statute.

The second limb of this is rather tendentious. What has the Internal Revenue Code got to do with retirement plans? Well, if an ERISA plan transacts with any party having a conflict of interest — its own manager, fiduciaries and so on — this is a prohibited transaction which is subject to a 15% tax. This is the kind of thing that freaks people out about ERISA.

Still, there’s a less tendentious way of getting there. Section 4795 of the Internal Revenue Code imposes a tax, but only on “prohibited transactions”, which are only with disqualified persons. Disqualified persons are defined as “parties in interest” to an ERISA employee benefit plan. So, if you recraft the representation so, you achieve the same effect:

No ERISA Funds. Party B holds no “plan assets” and is not a “party in interest” to an employee benefit plan, in each case as contemplated by the U.S. Employee Retirement Income Security Act of 1974 (or any successor statute).

See also

• ERISA