GAO Says Guidance Needed on DB Alternative Investments

September 11, 2008 ( - The Government Accountability Office (GAO), in a new report, recommends that the Department of Labor provide guidance for defined benefit plans on investing in hedge funds and private equity.

In its report, the GAO said the guidance should describe steps plans should take to address the challenges and risks of these investments.

The report pointed out that pension plans invest in hedge funds for potential benefits such as returns greater than the stock market and stable returns on investment. However there are also challenges and risks beyond those posed by traditional investments. As an example, the GAO said some investors may have little information on funds’ underlying assets and their values, which limits the opportunity for oversight.

While pension plan officials GAO spoke with generally had a long history of investing in private equity and said such investments have met expectations for returns, the report said a challenge of these investments is a wide variation in performance among funds.

According to the report, several recent surveys of private and public sector plans show investments in hedge funds and private equity generally comprise a small share of total plan assets, but a considerable and growing number of plans have such investments. Available survey data of mid to large-size plans indicate that between 21% and 27% invest in hedge funds, while over 40% invest in private equity. Such investments are more prevalent among larger plans, the report noted.

The GAO recommends guidance on hedge fund and private equity investing because of these challenges but also because, as it notes, the federal government does not specifically limit or monitor private sector plan investment in hedge funds or private equity, and state approaches to public plans vary. Under federal law, fiduciaries must comply with a standard of prudence, but no explicit restrictions on hedge funds or private equity exist, and while most states also rely on a standard of investor prudence, some also have legislation that restricts or prohibits plan investment in hedge funds or private equity and some do not.

GAO said the Labor Department agreed with its finding and recommendations.

The report is here .