figure 8

And My 2 cents, that's certainly a good point about terminations as well. You won't always know 18 months in advance when a plan is going to want to terminate. I'd say that's a good reason to recommend not investing in these.

David, that's a good observation, and yes, I certainly agree that those are not good reasons. Really, I'm not trying to justify that they "should" do this - I guess I'm now trying to justify that they "could" possibly do this, because after doing some research, that's what seems to be the case. If my research was leading me to believe that they couldn't do this, then I guess I'd be trying to justify that they couldn't do this. So I started this thread looking to ultimately justify whether they could or couldn't do this investment. Whether they should or shouldn't is probably outside the realm of my expertise though, I think. I like your last question though. Ultimately, I think I'll go back to the FA to explain some things and tell them that this appears to be a gray area, and that they'll need to seek counsel / do more research if they want to definitively draw a conclusion - and/or they could play it safe and avoid these investments altogether for DB plans.

I don't know. According to 29 CFR 2520.104-46 (http://www.law.cornell.edu/cfr/text/29/2520.104-46), a qualifying plan asset includes any assets held by any of the following: a. a bank or similar financial institution b. an insurance company qualified to do business under state law c. a broker-dealer registered under the Securities Exchange Act of 1934 d. any other organization authorized to act as a trustee for individual retirement accounts under IRC section 408 Could an illiquid asset meet any of these requirements? I would think it's possible. I feel like this stuff is getting beyond my current level of understanding of investments though (which is admittedly not a high level to begin with).

Yes, I think that probably is the most important question. There are several questions at play though, and I guess I'm trying to figure them all out. But I'd agree that the issue of prudence is the most significant. If it's not prudent, then I don't even need to worry about the audit question. The questions: First, is it even allowed to be considered, or is it prohibited? (I don't think it's specifically prohibited based on name) Second, if it is allowed to be considered, will it be prudent? (seems like it would be circumstantial - I think it could possibly be argued to be prudent) Third, if it will be prudent, is it a qualifying asset? (not sure - maybe sometimes yes, sometimes no?) Fourth, if it is not a qualifying asset, will the requirements for waiving an audit be met? (would need to be under 5% of assets, because, as you point out, bonding might be difficult)

My previous firm did this once with no issue. However, they did file for a determination letter first to get approval. I don't recall what sort of language was in the plan document.

The FA is suggesting this because they specialize in alternative investments and seem to feel strongly that they will help create a portfolio that will have high returns. I think your questions here make a lot of sense and kinda go along with the other post I just made. I think a major key is that a prudent approach is being taken to the investments. I'm not an investment expert either though, so I personally don't know how to look at something like this and say, "Yes, there has been sufficient prudence and diligence taken with these investments."

Thanks for the replies. Here's what I'm thinking... If the DB plan invests in these non publicly traded (and temporarily illiquid) REITs, such investment is not prohibited and doesn't require an audit as long as there is a general prudent approach being taken towards the DB plan assets. In other words, it's fine as long as the DB plan assets are diversified, there is sufficient liquidity to pay benefit payments, and the overall investment strategy is well-researched/sound/not careless (not sure what the best word is here). I guess I should clarify regarding the audit. After reading through the audit waiver requirements more closely, I'm still not immediately sure whether this type of investment is a qualifying plan asset. I think it is, because I think it's held by the broker-dealer, but I'm not really sure who holds it. But if it is a non-qualifying asset, then there's still no audit assuming a) the participant count waiver requirement is met and either b) the REITs make up less than 5% of the total assets or c) the REITs are appropriately covered by a bond.

I've been researching this topic, but I'm having trouble finding conclusive answers. I have a financial advisor asking about using REITs for DB investments. The REITs would just make up a part of the assets - say 10% or something. These particular REITs are illiquid for the first 12-18 months. During this time, their stated value does not change. Then, after 12-18 months, they become liquid, and their value changes at that point. This is how the FA described the REITs that they invest in to me. It seems like REITs (at least publicly traded ones) should be fine as far as DB assets go. But what's sticking out to me here as a red flag is the illiquid part. For these REITs that he is describing to me, I'm trying to verify that a) they're not prohibited, and b) they would not require an annual audit. Anyone have any experience with these type of REITs the FA has described to me? Thanks!

Agree on the 100+ participant comment. Thanks for the Gray Book references. That 2014 answer certainly is a rough one. I was hoping there might be some ambiguity or loophole I wasn't aware of - doesn't appear so though. Thanks.

I just wanted to follow up on this topic, because it looks like there was some disagreement a few years ago. If you are taking over a plan as the new actuary (and assuming you can match the prior actuary's numbers within 5%) - can you change the valuation date with automatic approval? It seems like the takeover situation shouldn't matter and there just is no automatic approval for such a funding method change, but I'd like to verify this. Small clients aren't going to pay $4000 just to change the val date (especially when the reason for the change is mainly just to make things more convenient and easier to understand/administer). Thanks in advance.