Hard-to-Value Investments

In September 2013, the U.S. Department of Labor (DOL) Office of Inspector General (OIG) issued results of its study on oversight of employee benefit plans that hold hard-to-value investments and other alternative investments. According to the report, 150 million Americans currently have approximately $6.5 trillion invested in retirement accounts that are governed by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA places the responsibility on plan administrators to accurately report the fair value of plan assets, which since 2010, has been seen a lot of attention from the Financial Accounting Standards Board related to employee benefit plans. The report also noted that as of 2010, hard-to-value investments comprised between $800 billion and $1.1 trillion of approximately $3 trillion in alternative investments.

The OIG’s study also noted that the Employee Benefit Security Administration (EBSA), which oversees the private sector management of employee benefits plans, does not have formalized regulatory guidance requirements for plan administrators to identify and adequately support hard-to-value investments. The study claimed that very few plan administrators obtain an independent valuation or demonstrate other methods (analytical) to determine the adequacy of the fair value reported by the custodian of the hard-to-value assets. With the increasing interest in DOL limited scope audits, which typically reduces the cost of a plan audit but also in which plan auditors perform significant less procedures over plan investment assets’ existence and valuation, the OIG recommended has recommended that the EBSA formalize regulatory requirements for plan administrators. Additionally, the OIG suggested that the ESBA improve procedures in enforcement reviews, along with seeking enhancements to the Form 5500 to allow for better data collection and targeting for plans with hard-to-value investments.

Read the report, "ESBA Needs to Provide Additional Guidance and Oversight to ERISA Plans Holding Hard-to-Value Alternative Investments" (link:  http://www.oig.dol.gov/public/reports/oa/2013/09-13-001-12-121.pdf), including the scope, methodology and full agency response.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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