A growing number of defined benefit plans, predominately large ones, are investing through hedge funds and in private equity funds, but the total investment constitutes less than 15% of total plan assets, the Government Accountability Office says in a new study.
The GAO report also cautions that investment in these entities constitutes substantially more ‘challenges” than do investment in more prosaic instruments, like stocks and bonds.
The GAO report criticizes the Department of Labor (which regulates defined benefit plans as part of its duties for oversight of ERISA), saying the agency has not followed through on a 2008 recommendation that it provide guidance to defined benefit plans on investing in hedge funds and private equity partnerships.
The GAO cites a concern about having smaller funds invest in these instruments.
“According to plan officials, state and federal regulators, and others, some pension plans, such as smaller plans, may have particular difficulties in addressing the various demands of hedge fund and private equity investing,” the GAO says. “The Department of Labor generally agreed with our recommendation, but has yet to take action.”
The GAO report notes that “the lack of uniformity among these investments could complicate the development of comprehensive guidance for plan fiduciaries.” The report adds that, according to a survey of large plans, the share of plans with investments in hedge funds grew to 60% in 2010 from 11% in 2001.
Over the same period, investments in private equity were more prevalent but grew more slowly, an increase of large plans to 92% in 2010 from 71% in 2001.
But GAO says the average allocation of plan assets to hedge funds was a little over 5%. And the average allocation to private equity was just over 9%.