Caution: 3 ERISA "Traps"

Calculating the amount of ERISA-qualifying assets a fund holds might at face value seem like a simple proposition, but it can actually become quite complicated quickly (which is why many managers simply seek to avoid going near the 25% threshold to keep things straightforward).

Below are three major, potential complexities that a manager should be aware of:

• #1 - Blending non-ERISA and ERISA BPI assets

• #2 - Underlying BPI % of entity investors

• #3 - Effects of redemptions/withdrawals on ERISA ratio

More on Complexity #1: Blending non-ERISA and ERISA BPI assets

As previously described, some managers aim to take on BPI assets in a given fund, but only those which are non-ERISA-qualifying. In theory, such a fund could take on well in excess of 25% of its assets from BPIs.

However, there is a risk to such a fund that a manager must keenly watch - if it takes on any ERISA-qualifying BPI assets, then all the non-ERISA BPI assets are suddenly counted towards the threshold.

Let's put that in a clear example:

• One Ring Capital has $10,000,000, and 40% of its assets are from IRA plans. While that's 40% BPI, it's all non-ERISA qualifying BPI assets, so the fund manager is in the clear. Yay!

  • One Ring Capital accepts a new subscriber for a small amount, say, $250,000. That $250,000 is from an ERISA plan.

  • That's just $250,000 of $10,250,000, or around 2%, right? Wrong.

    • Because One Ring Capital has any amount of ERISA-qualifying assets, now all the other BPI assets are counted towards the threshold.

  • One Ring Capital suddenly has $4,250,000 out of $10,250,000 (~40%) as far as the 25% ERISA threshold calculation is concerned. Uh oh...

Many managers are unaware of this reclassification of BPI assets and, as you can see, sometimes end up with a nasty surprise.