The rule is triggered if you raise enough dollars through retirement accounts. Generally speaking, it is wise to stay below 25% of retirement plan assets unless you qualify for an exception. For "fund of funds", the fund acts as an ERISA investor.
What happens when the plan asset rule is triggered?
The plan asset rule can trigger additional compliance, such as:
- The manager will become a “fiduciary” with respect to any ERISA plan invested in the fund, and the manager will be subject to prohibited transaction rules.
- Portfolio transactions of the fund will be subject to potential prohibited transaction issues and may need to consider the application of one or more exemptions (e.g., most managers are familiar with the “QPAM/Qualified Professional Asset Manager” exemption).
- In the case of a “fund of funds,” the fund itself will be treated as an ERISA investor with respect to any “downstream” fund in which it invests.
When working with Rocket Dollar, we want to help you avoid triggering the Plan Asset Rule as this is a much higher standard and presents higher liability for issuing companies. With proper care and compliance, your fund should be able to enjoy more investment with minimal hassle.
How does the Plan Asset Rule apply?
The Plan Asset Rule applies after 25% or more of a fund or company share class is owned by retirement dollars, unless one of the exceptions below applies.
A key point is that the 25% rule applies to all share classes individually. For example if class A represents 90% of the fund/entity’s assets, and class B represents 10% of the total fund equity asset, you could not have more than 2.5% of class B shares owned by benefits or retirement plans.
Another example is a fund that has two classes of equity, with Class A representing 80% of the entity’s total equity, and Class B representing the remaining 20% of the entity’s total equity. If
benefit plan investors own less than 25% of the Class A interests but 25% or more of the
Class B interests, the assets of the entire fund will be considered plan assets. This is
true even though benefit plan investors own less than 25% of both the Class A interests and the
total equity of the fund.
Exceptions to the Plan Asset Rule
- Operating Companies - A company that is the result or sale of a product or service other than the investment of capital.
- Real Estate Operating Company - A company that has invested 50% or more in real estate.
- Venture Capital Operating Company - A company that has invested 50% or more into venture capital investments.
- Publicly Traded Company - A company that is not subject to the Plan Asset Rule.
- Debt/Note Investments - If the plan’s investment is in a debt instrument or note, the rule does not apply as it only applies to equity investments.
What is never given an exception?
Companies that are 100% owned by retirement plans - If a company is 100% owned by retirement plans, the Plan Asset Rule exceptions do not apply. As a result, in 100% Plan-owned scenarios, you must always apply the Plan Asset Rule.
Do Rocket Dollar Accounts count toward the 25% for the plan asset rule?
Rocket Dollar Self-Directed IRAs
IRAs, even though they are not subject to ERISA, apply to the 25% Plan Asset Rule.
Rocket Dollar Self-Directed Solo 401(k)s
Solo 401(k)s are not automatically subject to ERISA, as these plans do not have any common law employees to protect, but would still count against the 25% Plan Asset Rule.