Qualified Plan Assets in Accredited Investor Definition
The SEC definition of "accredited investor" is generally important because satisfying those criteria allows taxpayers to participate in certain private investments that are not otherwise available to the general public—usually because of a lack of publicly available information about the investment itself. Relevant criteria currently include considerations surrounding the taxpayer's net worth, professional knowledge, experience or certifications (for example, a Series 7 license), among other criteria. Accredited investors generally have access to a wider range of investment opportunities, including venture capital investments, private equity, hedge funds and certain real estate investments. Recent calls have arisen to include a taxpayer's qualified retirement plan assets when determining whether they have sufficient net worth to qualify.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about whether qualified plan assets should be included in determining whether an investor meets the criteria for accredited investor status.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: Qualified plan investments form a significant part of most taxpayers' net worth--and should absolutely be considered when determining whether an individual has the financial sophistication necessary to invest in more risky private investments via the accredited investor rules.
Bloink: Retirement plan assets shouldn't be considered when determining whether an investor has the sophistication needed to invest in risky private investments. The vast majority of qualified plan participants rely on default contributions and default investment options. When we see that the bulk of a taxpayer's assets are held within a qualified plan, we have to assume that they're not making their own investment decisions--or proactively seeking the advice of qualified investment advice professionals.
_______________________________________
Byrnes: Taxpayers who have amassed significant retirement savings in tax-preferred plans tend to be more financially literate when compared to taxpayers who hold more of their funds outside of qualified plans. Qualified plans offer substantial tax benefits. When we see that a taxpayer has taken full advantage of the opportunity to invest in these tax-preferred vehicles, we should take that as information showing the individual's financial sophistication.
Bloink: Retirement assets should be held within a different bucket because the taxpayer often does not have free access to those retirement funds if they become necessary to cover losses associated with risky investments. If we bring retirement assets into the mix, we're lumping them in with the taxpayer's non-retirement assets, which are the assets we want to encourage taxpayers to draw upon to engage in risker investment opportunities without jeopardizing their stable retirement.
_______________________________________
Byrnes: We should never punish taxpayers for taking full advantage of qualified plan investing. Excluding qualified plan assets from the definition of accredited investor would do just that—discouraging taxpayers from participating in some of the most tax-preferred investment opportunities in favor of taxable—and often more risky—investment strategies. We're in no way saying that a taxpayer should draw on their retirement accounts to fund investment opportunities available only to accredited investors—only that the significant funds amassed in their retirement accounts should be considered when evaluating their financial sophistication.
Bloink: By definition, transparent information about the underlying investments is typically not available when accredited investor status is needed and relevant to an investment opportunity. This is why the accredited investor definition exists in the first place. These investments should be reserved for taxpayers with the sophistication necessary to evaluate the investment without significant public information and the net worth to take the hit if the investment eventually goes south.