What Are Plan Assets and Why Do They Matter?

“Plan assets” refer to the funds or property held within a retirement or benefit plan, such as a pension plan, 401(k), or employee benefits plan. These assets are specifically designated and used to provide future benefits to participants, including retirement income or healthcare.

Understanding the Definition of Plan Assets

The definition of “plan assets” is governed by the Employee Retirement Income Security Act of 1974 (ERISA) and Department of Labor (DOL) regulations. Plan assets include any property, tangible or intangible, in which an employee benefit plan has a beneficial ownership interest.

This definition extends beyond cash and directly held securities. Participant contributions paid to an employer or withheld from employee pay are considered plan assets once they can be segregated from the employer’s general assets, typically within a few business days. Employer assets become plan assets when the plan acquires an interest in them, such as by placing them in a trust.

A key aspect of defining plan assets is the “look-through” rule, outlined in DOL Regulation 29 C.F.R. Section 2510.3-101. This rule dictates that if an ERISA plan invests in certain entities, the underlying assets of that entity can also be considered plan assets. This occurs when a plan acquires an equity interest in an entity that is not publicly traded or registered as an investment company, and benefit plan investors hold 25% or more of the value of any class of equity interests. The purpose of this rule is to prevent investment fund managers from indirectly circumventing ERISA’s regulations.

Implications of Plan Asset Status

Classifying an asset as a “plan asset” triggers responsibilities and regulatory oversight. This status imposes duties on those who manage or control these assets, along with rules to prevent conflicts of interest and ensure proper administration.

The presence of plan assets imposes fiduciary duties on individuals or entities with discretionary authority over the plan’s management or assets, or those providing investment advice for a fee. Fiduciaries must act solely in the interest of plan participants and beneficiaries, known as the duty of loyalty. They are also bound by the duty of prudence, requiring them to act with the care, skill, and diligence of a prudent person. Fiduciaries must diversify plan investments and adhere to the terms of plan documents consistent with ERISA. Failure to uphold these duties can result in personal liability for fiduciaries, including responsibility for plan losses.

Transactions involving plan assets are subject to prohibited transaction rules under ERISA Section 406 and Internal Revenue Code Section 4975. These rules prevent self-dealing, conflicts of interest, and other abuses that could harm plan participants. Prohibited transactions include sales, exchanges, or leases of property, lending money, or furnishing goods or services between the plan and “parties in interest.” A party in interest can include plan fiduciaries, the employer sponsoring the plan, plan service providers, or individuals with significant ownership stakes.

Engaging in a prohibited transaction can lead to penalties. The Department of Labor (DOL) can impose a civil penalty, which can escalate if the transaction is not corrected. The Internal Revenue Service (IRS) may also levy an excise tax. Fiduciaries may be personally liable to restore any losses to the plan or disgorge profits made through improper use of plan assets.

Plan assets also necessitate reporting and disclosure requirements to regulatory bodies. Plan administrators are required to file annual reports, such as Form 5500, with the DOL and IRS. This form provides information about the plan’s financial condition, investments, and operations. Plans may require an independent audit report to be attached to their Form 5500. These obligations ensure transparency and allow regulatory agencies to monitor compliance with ERISA.

Common Examples of Plan Assets

Examples of plan assets include direct contributions made by employees and employers to the plan. These funds are segregated and restricted to provide benefits.

Cash, stocks, bonds, and mutual funds held directly by the plan are common examples of plan assets. These investment vehicles are managed by trustees or plan administrators. The value of these assets is regularly assessed to determine the plan’s financial health.

If an ERISA plan invests in a private equity or venture capital fund, and the plan’s investment represents 25% or more of that fund’s equity interest, the underlying assets may be considered plan assets under the “look-through” rule. This means the fund’s managers could then become fiduciaries subject to ERISA’s rules.

Direct investments made by a plan, such as real estate or derivative instruments, also qualify as plan assets. These rules ensure that all assets used to fund employee benefits are protected by ERISA’s fiduciary standards.

Assets That Are Not Plan Assets

Just as important as understanding what constitutes plan assets is recognizing what does not. Certain assets or situations are excluded from the definition of plan assets or meet specific exemptions.

General account assets of an insurance company typically do not constitute plan assets, even if those accounts support policies issued to employee benefit plans. This exclusion applies to guaranteed benefit policies where the insurer takes on the investment risk. The rationale is that the plan’s interest is in the policy itself, not in the insurer’s broader general account, which combines premiums from various lines of business. However, assets held in an insurance company’s separate account, where the investment performance is passed directly to the plan, are generally considered plan assets.

Investments in certain operating companies are also typically not considered plan assets. If an ERISA plan invests in a traditional operating company primarily engaged in producing or selling goods or services, the plan’s investment is usually limited to its equity interest in the company, not the company’s underlying assets. This exception applies because the plan is not indirectly seeking investment management services from the operating company. Specific types of operating companies, such as Venture Capital Operating Companies (VCOCs) and Real Estate Operating Companies (REOCs), also have exemptions from the “look-through” rule, provided they meet specific activity and investment requirements.

Furthermore, investments in publicly offered securities generally do not result in the underlying assets of the issuer being considered plan assets. This exception applies if the security is freely transferable, widely held, and registered under the Securities Exchange Act of 1934 or sold as part of a public offering. This exemption acknowledges that publicly traded securities are subject to existing regulatory frameworks and are not typically structured to circumvent ERISA’s protections. Another exclusion applies if benefit plan investors hold less than 25% of the value of any class of equity interests in an entity. This “insignificant benefit plan investment” exemption recognizes that a minimal plan investment should not trigger extensive ERISA oversight over the entire entity.