Investment In Company's Own Hedge Fund?

Good morning and Happy New Year to all!

I have a client that is a Private Equity Fund and it's a participant directed accounts.  One of the plan participants wanted to know if it was alright to invest in the firm's own hedge fund.  May question is if that would be allowed in general, or could it be viewed as prohibitive by the IRS since it's the firm's own fund.

Thanks in advance!

It might be unwise to answer a participant’s inquiry until the plan’s sponsor or fiduciary decides whether to allow or preclude the plan’s investment in the fund.

Whichever plan fiduciary decides whether to designate or allow the fund as an investment alternative might consider, with its lawyer’s advice, at least these questions:

1)        Do the plan’s governing documents permit or preclude investment in the fund?

2)        Do the fund’s governing documents permit or preclude investment by an ERISA-governed plan?

3)        If the fund’s governing documents do not preclude the plan’s investment, would the fund’s manager admit the plan as an investor?

4)        Is the fund organized under the law of a State of the United States of America? Or is the fund organized under another nation’s law?

5)        Is the fund’s general partner or other manager organized under the law of a State of the United States of America? Or is the manager organized under another nation’s law?

6)        If the retirement plan invests, would the indicia of ownership of all plan assets be maintained within the jurisdiction of the district courts of the United States?

7)        Would the fund meet conditions for treatment as a venture capital operating company?

😎        If the retirement plan invests, would investments by benefit-plan investors be insignificant?

9)        If the retirement plan invests, would this preclude an incentive fee the fund’s manager desires?

10)    If the retirement plan invests, would this preclude a carried-interest arrangement the fund’s manager desires?

11)    If the retirement plan invests, would this enable the fund to obtain a portfolio investment the fund otherwise could not obtain?

12)    Has the plan’s fiduciary received its lawyer’s written advice that the plan’s investment in the fund would not result in any nonexempt prohibited transaction.

13)    Could the availability of the fund as an alternative for participant-directed investment be imprudent because some participants might lack a practical capability to evaluate the investment?

14)    Are the plan’s trustee, administrator, and other fiduciaries ready to administer participant-directed investment in the fund using the currently contracted services of the administrator’s recordkeeper and third-party administrator?

15)    Would the plan or its fiduciary limit the portion of an individual’s account for which a participant, beneficiary, or alternate payee may direct investment in the fund?

16)    If not, could a restraint on redemptions of fund units or partnership interests make impractical any aspect of the plan’s operations (including allocations of plan-administration expenses to individuals’ accounts)?

17)    Could a restraint on redemptions of fund units or partnership interests restrain how frequently a directing individual may change investments, and so defeat a fiduciary’s ERISA § 404(c) defense?

A concern about self-dealing (or exempting it) is just one of many points to consider.