A DoL guidance document should particularly detail the difficulties sponsors of small plans face in valuing such assets and with other related issues, the GAO said. Dealing with private equity and hedge fund assets “can be daunting even for large plan sponsors,” a GAO official asserted in scheduled Congressional testimony Tuesday.
The restated suggestion came from Barbara Bovbjerg, GAO Managing Director, Education, Workforce, and Income Security. Bovbjerg was scheduled to appear before the House Subcommittee on Health, Employment, Labor, and Pensions of the Education and Labor Committee.
The GAO suggestion involves the DoL’s Employee Benefits Security Administration (EBSA) developing hedge fund and private equity investment guidance that, among other things:
- outlines the implications of a hedge fund’s or fund of funds’ limited transparency on the fiduciary duty of prudent oversight.
- discusses the implications of these best practices for some plans—especially smaller plans—that might not have the resources to take actions consistent with the best practices, and thus would be at risk of making imprudent investments in hedge funds.
In the testimony, Bovbjerg told lawmakers that hedge fund and private equity holdings by pensions continue to grow as sponsors seek better returns on assets and that such trends are expected to stay the same in the future.
“Our past work indicates that such assets may serve useful purposes in a well thought out investment program, offering plan sponsors advantages that may not be as readily available from more traditional assets,” Bovbjerg said. “Nonetheless, it is equally clear that investments in such assets place demands on plan sponsors that are significantly beyond the demands of more traditional asset classes.”
Bovbjerg quoted a 2009 Greenwich Associates survey showing that larger plans are more likely to hold hedge fund and private equity assets than mid-size programs. Thirty percent of mid-size plans—those with $250 to $500 million in total assets—were invested in hedge funds, compared to 53% the largest plans—those with more than $5 billion in total assets.
Asset Valuation Difficulties
The GAO official contended that asset valuation issues can prove particularly vexing for some plan sponsors with hedge funds because many such funds may own thinly traded securities and derivatives whose valuations can be complex, and in some cases subjective. She said a plan may not be able to get timely information on the value of assets owned by a hedge fund and that hedge fund managers may refuse to disclose information on asset holdings and the net value of individual assets largely because release of such information could compromise their trading strategy.
Similarly, Bovbjerg explained, valuations of private equity investments are uncertain during the fund’s cycle, which often lasts 10 years or more. Unlike investments which are traded and priced in public markets, plans have limited information on the value of private equity investments until the underlying holdings are sold.
It may also prove more difficult for some plan sponsors to adequately manage investment risk with hedge fund and private equity holdings and such investments can also present special liquidity concerns, the GAO official said.
Finally, hedge fund and private equity holdings can place severe strains on some sponsors in carrying out their normal back-office operations, Bovbjerg said.
She noted the plan sponsors interviewed by the GAO said it was key to choose private equity and hedge fund investments carefully and with well thought-out strategies in mind. Other sponsors suggested investment contracts should negotiate fee structures, valuation procedures, and even the degree of leverage the funds will employ.
The testimony is at http://www.gao.gov/new.items/d10915t.pdf.