Hedge Fund Offer Own Investments in its Employer-Sponsored Plan?

[waid10]

I wasn't sure if this was the correct board to post this on, but I couldn't find another spot that was more suitable.

I have a potential new client that is a hedge fund company. They have roughly 40 employees and do not currently have any kind of qualified plan. They are interested in a DC plan but want to offer funds within their hedge (that they manage) as plan investment options. This sounds like a prohibited transaction on its face. They realize that they would have to offer other investments to round out a diversified lineup. It made me wonder how brokerage firms handle a 401(k) plan at their firms. For example, if I am an employee at Fidelity, does Fidelity offer Fidelity funds as investment options within the plan? If so, how do they avoid PT rules and the fiduciary provisions of ERISA? It would seem that this is close to what my client wants to do.

Any help you can provide is helpful.

[jpod]

If you are acting as an ERISA lawyer advising this client, you will find that there are potential pt issues here but possibly things can be structured to avoid them. Way too complicated to try to sort through on a message board.

If you are serving as the recordkeeper or another service-provider but not as ERISA lawyer, you will be doing your client a favor if you suggest to them that there are ERISA legal issues here and they need to discuss with an ERISA lawyer.

[Peter Gulia]

A class exemption allows, under some conditions, a retirement plan that covers employees of an open-end SEC-registered investment company (and employees of that company's investment adviser) to buy and sell shares of that company. 42 Federal Register 18734-18735 PTCE 77-3 (April 8, 1977). The kind of entity that practitioners call a "hedge fund" usually lacks at least one of the conditions needed to meet that "mutual fund" exemption.

There can be ways for a retirement plan to invest in hedge fund interests. But in the absence of a class exemption, it calls for a lawyer with experience in unraveling prohibited transactions.