THE PROBLEM WITH ALTERNATIVE INVESTMENTS

2022 Dec 28Alternative Investments, Fair Market Value

A major focus of this ERISA blog is to highlight the differences between standard pension investments (such as mutual funds) and alternative investments–discussed below.

Standard pension investments trade on a public exchange at a publicly-disclosed fair market value. These are investments in things like mutual funds, with assets that can be valued at fair market value on a daily basis.

However, alternative pension investments are a very different animal: nearly all alternative assets are illiquid–assets that cannot be valued daily and therefore may have significant withdrawal limitations.  These are things like cryptocurrencies, structured products, complex products, asset-backed securities, hedge funds, private equity funds, and the like (see FAQ).

Alternative pension assets are typically traded “over the counter” between two parties that assign value to the asset based on their own assessment, without the benefit of public market valuation. These assets are typically valued at net asset value instead of fair market value, which means the actual fair value of the asset, at any point in time, involves a fair amount of guesswork.

Thus, the single biggest distinction between standard pension investments and alternative pension investments is the challenge of assigning fair market value to an alternative investment asset. And if you really don’t know the fair market value of your investment, it will not likely be available to you, if needed.

Put another way, if your pension or 401(k) plan holds alternative assets, the value of your plan cannot be readily controlled or cashed in. Rather, your plan is at mercy of powerful market forces beyond your control. Today, in 2023, the majority of defined benefit and defined contribution plans hold alternative investments–commitments of your money that very few plan participants understand.

Our highest value to pension plan participants is to target these risky “alternative” investments in litigation so plan participants better understand the risks embedded in their plans–and voluntarily choose to accept the investment risk–or not.

About the Author

Kevin McBride is a Pension & Benefits Litigation Attorney in Los Angeles, California, USA.

He is admitted into three California US District Courts (Central, Southern, and Northern), the US District Court for the District of Utah, the Ninth Circuit Court of Appeals, and the Federal Circuit Court of Appeals. McBride holds a BA degree in Economics from the University of Utah and a JD from the University of Utah College of Law, where he served on the Utah Law Review. He is a member of the Federalist Society and the Federal Bar Association.