Benefit Plan Investors
Aka "BPI" or "BPIs". Taking subscribers who are considered BPIs introduces additional compliance considerations that managers should be aware of.
Why does this matter?
If a fund's assets are comprised of above a certain threshold and certain types of BPI assets, then the fund may become subject to "ERISA" reporting and compliance obligations. These obligations, among other things, are costly, non-trivial, require substantial legal/compliance work, and may even require an investment adviser to re-consider its registration status.
Generally, most managers try to avoid tripping this threshold due to the administrative and cost complexity it introduces.
Note that this is generally a responsibility of the manager to monitor. It is not the obligation of a fund's service providers to stop the manager from hitting these thresholds, as the manager is in control of what assets and investors it takes on.
tl;dr takeaway?
Most managers will seek to do either of the following:
Keep the total amount of tax-advantaged dollars they take on (and their associated gains) under 25%. Ideally well below 25%; OR
Be absolutely absolutely sure to only take on IRA / SEP / Keogh plan dollars from individual investors, and no other tax-advantaged dollars.
This allows managers to safely avoid ERISA considerations. For managers seeking to take on tax-advantaged dollars beyond the above two scenarios, while possible, things can get complicated quickly (and such a manager should definitely consult an attorney about this specific topic).
Who is considered a BPI? What are considered BPI assets?
Both individual natural person and entity subscribers could be considered BPIs depending on either the means by which they invest, and/or the type of entity they are. For the most part, this is fairly self-descriptive (i.e. are the dollars benefit plan dollars or not?).
Investments made by way of a BPI are considered BPI assets, the amount of which can potentially introduce significant compliance considerations for any given fund (more below). Additionally, the gains and/or losses associated to BPI assets are themselves considered BPI assets.
For example, if a BPI invests $1,000,000, and value of that particular capital account increases through positive performance by 25% to $1,250,000, then the $250,000 gains are considered BPI assets.
In the next section, we'll discuss the difference between ERISA-qualifying BPI assets vs non-ERISA assets, which is a critical concept for fund managers to understand and track. Read on first to learn more about BPI types.
Individual BPIs and BPI Assets
For an individual subscriber to be considered a BPI, they must be investing via a tax-advantaged account, which can be any of a:
Individual Retirement Account ("IRA");
Simplified Employee Pension Plan ("SEP"); or
Keogh Plan ("Keogh"). A Keogh Plan is a type of retirement plan for self-employed individuals or unincorporated small businesses.
Although whether a subscriber invests from an IRA / SEP / Keogh plan is important, fortunately, subscribers are typically asked if they will be investing from such a plan in a fund's subscription documents, so such assets are easy to identify. It also generally does not matter which particular plan type it is, so it generally manifests as a single question, like so:
Calculating the amount of assets from an individual BPI that are BPI assets is simple. It's 100% of the assets that are contributed from a BPI. So, for example, if an individual invested $500,000, half from their own bank account, and half from an IRA, then only that IRA half would be considered BPI assets.
Entity BPIs
Unlike an individual BPI, there are far more variations of entities that could be considered BPI, depending on the type of entity, how such entity is specifically set up, and/or the entity's own underlying beneficial owners. And unlike in the case of an individual BPI, there can be further complications potentially associated calculating the BPI assets of an entity investor.
For example, imagine a scenario in which a fund accepts an investment from another private fund i.e. a "fund of funds" investment. If that fund itself has BPI investors, then a portion of the investment would be considered BPI assets for the fund being invested in. This is commonly misunderstood/not known/ignore by fund managers, which is incorrect and could cause severe headaches if the ERISA threshold is tripped accidentally as aresult.
For example, imagine you run a fund called "One Ring Capital", and you accept an investment from "Baggins Capital". Let's assume that Baggins Capital itself has 50% ERISA qualifying BPI assets.
One Ring Capital has $20,000,000 AUM, and $3,000,000 of that is ERISA-qualifying BPI assets.
Baggins Capital invests $10,000,000 into One Ring Capital
Because Baggins Capital itself has 50% ERISA qualifying BPI assets, 50% of the $10,000,000, or $5,000,000, is considered ERISA qualifying BPI assets for One Ring Capital.
One Ring Capital now has $30,000,000 AUM. However, while it previously had only 3/20th of the fund (15%) as ERISA-qualifying assets, it now has $8,000,000 i.e. 8/30ths of the fund (27%) as ERISA-quafliying assets
One Ring Capital has now exceeded the 25% ERISA reporting threshold because it accepted $10,000,000 from Baggins Capital. Uh oh!
In the preceding example, many managers might not even consider that accepting an investment from a fund of funds could cause an issue. Unfortunately for those investors, ignorance of the law is not an excuse from compliance with the law.
That said, the above example is actually re
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