Consider a real estate fund manager who has successfully built a track record and is ready to raise an institutional fund. A pension fund allocator expresses serious interest and indicates it can commit $25 million, which would represent meaningful institutional validation for the manager’s platform. The subscription closes. The pension fund money is in.
What the manager may not fully appreciate is that the pension fund’s investment, depending on how it is sized relative to the fund’s other investors, may have just changed the legal character of everything the manager does. The fund’s assets may now be plan assets under the Department of Labor’s regulations. The general partner may now be an ERISA fiduciary. Every acquisition, disposition, fee arrangement, affiliate transaction, and compensation decision that follows may be subject to ERISA’s fiduciary standards and prohibited transaction rules, in addition to the fund documents and the ordinary standards of private fund management.
Real estate fund managers often treat ERISA primarily as an investor eligibility question: which investors can participate, how much can they invest, and does the fund need to track plan investor ownership percentages. Those questions matter, but they are the beginning of the ERISA analysis, not its full scope. The harder problem is what happens after the fund crosses into plan asset territory. At that point, the analysis shifts from investor intake to fiduciary status, prohibited transaction risk, compensation design, and affiliate conflict management, and those issues sit primarily at the GP and management company level.
This post addresses the plan asset rules and their consequences for real estate fund GPs and management companies: how look-through works, when it is triggered, what fiduciary obligations attach to the people who exercise authority over plan assets, what the prohibited transaction framework means for fee and affiliate arrangements, how the QPAM exemption that many fund managers rely on changed materially in 2024, and what structural strategies are available to sponsors who want to accept pension plan capital without inheriting the full weight of ERISA’s most demanding compliance obligations.
How the Plan Asset Look-Through Works
What Ordinary Fund Investment Does Not Do
When a pension fund invests in a private real estate fund, the basic principle under ERISA is that the plan owns its interest in the fund, not an undivided interest in each of the fund’s underlying properties and investments. The plan has one asset: its equity interest in the fund vehicle. The fund’s properties, contracts, and investment positions belong to the fund, not to the plan.
That baseline is what makes private fund investing workable for pension plans at all. Without it, every asset held by every fund in which the plan invested would be a plan asset subject to ERISA’s fiduciary and prohibited transaction requirements, which would effectively prevent pension funds from participating in private markets on any meaningful scale.
When Look-Through Applies and Changes Everything
The Department of Labor’s plan asset regulation creates an exception to that baseline. If an ERISA plan acquires an equity interest in a private entity whose equity interests are not publicly offered securities and that is not a registered investment company, the plan’s assets include both the equity interest in the fund and an undivided interest in each of the underlying assets of the fund, unless an exception applies. When look-through applies, the fund’s properties, investments, contracts, and cash positions are all treated as plan assets for ERISA purposes.
The phrase “for ERISA purposes” carries significant weight. It means the plan asset designation is not merely a label. It activates ERISA’s full fiduciary and prohibited transaction framework with respect to those assets. Every person who exercises authority or control over the management or disposition of the underlying assets, and every person who provides investment advice for a fee with respect to those assets, becomes an ERISA fiduciary of the investing plan. The obligations that come with that status are not limited by what the fund’s governing documents say or by what is standard practice for private fund managers. They are imposed by federal statute, and they are not waivable.
The Benefit Plan Investor Definition and Why It Is Broader Than Expected
Look-through applies when benefit plan investors hold 25% or more of any class of equity interests in the fund. The definition of benefit plan investor is broader than many sponsors assume. It includes employee benefit plans subject to ERISA Part 4, plans described in Code Section 4975(e)(1) such as IRAs, and entities whose own underlying assets include plan assets as a result of another plan’s investment in them. That last category is the source of the upstream contagion problem: a plan that invests in a fund, which in turn invests in another fund, can cause the second fund’s assets to be treated as plan assets even if no ERISA plan invested in the second fund directly.
Governmental plans, church plans, and foreign plans are generally not benefit plan investors for purposes of the 25% test, which is why sponsors sometimes use them to fill out a fund’s investor base without affecting the plan asset calculation. But that strategy requires careful tracking. A plan that was a governmental plan when it subscribed and that later changes its character, or a feeder fund that invests government plan capital alongside ERISA plan capital without clearly segregating the two, can produce unexpected outcomes in the plan asset calculation.
The 25 Percent Test: What It Actually Measures
The 25% significance threshold is more technical than most fund summaries make it sound. Under the regulation, equity participation by benefit plan investors is significant if, immediately after the most recent acquisition of any equity interest in the fund, 25% or more of the value of any class of equity interests is held by benefit plan investors. Three elements of that sentence deserve careful attention: the class-by-class measurement, the timing of the measurement, and the treatment of manager and adviser interests in the denominator.
Class-by-Class Testing and the Denominator Rule
The test applies to any class of equity interests, not to the fund as a whole. A fund with multiple classes of interests, such as separate classes for founders, co-investors, preferred return tiers, sidecar participants, or special governance arrangements, must run the 25% calculation for each class independently. It is possible for a fund to be safely under 25% on one class while a different class crosses the threshold.
The denominator in the calculation is not simply total fund equity. For purposes of the 25% test, interests held by any person who has discretionary authority or control over the fund’s assets, or who provides investment advice for a fee with respect to those assets, and interests held by any affiliate of such a person, are excluded from the denominator. The practical consequence is significant: when manager or adviser interests are excluded from the calculation, the percentage held by benefit plan investors is a fraction of a smaller denominator, which produces a higher percentage than the same plan capital would represent in a simple all-inclusive calculation. A fund manager who divides pension fund dollars by total equity and concludes the fund is safely under 25% may be wrong because the denominator was too large.
Timing: Measurement After Each New Acquisition
The regulation measures significance immediately after the most recent acquisition of any equity interest in the entity. That means the test is not run once at the fund’s final close and then forgotten. It must be run after each subsequent acquisition of an equity interest, which includes new closings with additional investors, transfers of existing interests to new holders who may be benefit plan investors, admissions of new participants in co-investment vehicles or sidecars, and potentially certain restructurings that result in the issuance of new equity.
A fund that was safely under 25% at its first close can cross the threshold at a subsequent close if new benefit plan investors are admitted or if existing interests are transferred to benefit plan investors. The FBT Gibbons analysis confirmed that if the percentage drops below 25% and remains there, the fund is no longer required to comply with ERISA’s fiduciary and prohibited transaction rules going forward, but not retroactively. The forward-only nature of that relief is cold comfort for a fund that has already been operating as a plan asset vehicle and must unwind the compliance consequences of that period.
| 📌 The Ongoing Monitoring Discipline the 25% Test Requires A fund that intends to stay below the 25% significance threshold needs a monitoring system that is more rigorous than most sponsors initially design. The calculation must be run after each new closing, each transfer of interests, each admission to a related vehicle, and any restructuring that results in a new equity acquisition. Effective monitoring requires tracking the benefit plan investor status of every equity holder in the fund, not just the investors who disclosed their status at subscription. Investor status can change. A feeder fund that was not a benefit plan investor when it subscribed may become one if its own underlying investors later include ERISA plans in sufficient concentration. Transfer restrictions and pre-approval requirements for transfers of fund interests are part of the ERISA compliance architecture, not just standard fund governance. Many sponsors underestimate the monitoring burden because they focus on the initial capitalization table and assume a clean launch solves the problem indefinitely. The regulation’s repeated measurement framework means the problem can arise later, and discovery at the wrong moment, during a transaction, a financing, or an audit, is much more expensive to address than prevention through consistent monitoring. |
The Fiduciary Consequences When Look-Through Applies
When look-through applies and the fund’s underlying assets are treated as plan assets, every person who exercises authority or control over the management or disposition of those assets, and every person who provides investment advice for a fee with respect to those assets, is an ERISA fiduciary of the investing plan. For a real estate fund, that means the GP and the management company are typically the first entities that analysis reaches.
What ERISA Fiduciary Duties Require
ERISA fiduciary duties are the highest standard of care under federal law for financial decision-making. An ERISA fiduciary must act solely in the interest of plan participants and beneficiaries, for the exclusive purpose of providing benefits to participants and paying reasonable plan expenses. The fiduciary must act prudently, with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use. The fiduciary must diversify plan investments to minimize the risk of large losses. And the fiduciary must act in accordance with plan documents to the extent they comply with ERISA.
For a real estate fund GP, these requirements change the operating framework. Business judgment under the fund’s LPA is necessary but no longer sufficient. Decisions about acquisitions, valuations, dispositions, workouts, expense allocations, cross-fund allocations, portfolio company services, and consent rights must be evaluated for consistency with ERISA’s duty of prudence and duty of loyalty in addition to the fund documents. ERISA fiduciaries can be personally liable to restore losses resulting from fiduciary breaches, and the DOL has authority to pursue fiduciary breach claims independent of any action by plan investors.
The 2024 DOL Fiduciary Rule: What Changed
On April 25, 2024, the Department of Labor issued a final rule redefining investment advice fiduciary status under ERISA. The new rule broadens the definition of investment advice beyond the five-part test that had been in effect since 1975, which required advice to be given on a regular basis pursuant to a mutual understanding that the advice would serve as a primary basis for investment decisions. Under the new rule, a person is an investment advice fiduciary if the person makes a recommendation with respect to monies or other property of a plan for a fee or other compensation in a context where the person represents or acknowledges acting as a fiduciary, provides advice pursuant to a written or verbal understanding that the advice is based on the recipient’s particular needs, or directs advice to a specific recipient regarding the advisability of a particular investment or management decision.
The new fiduciary rule was challenged in litigation, and its ultimate enforceability may be uncertain depending on further court proceedings. However, even if the new rule is ultimately vacated or stayed in its current form, the underlying statutory fiduciary status analysis under ERISA Section 3(21)(A) remains fully operative. A fund manager who exercises discretionary authority or control over plan assets is a statutory ERISA fiduciary independent of any regulatory definition of investment advice. The new fiduciary rule matters most for advisers who might otherwise avoid fiduciary status by structuring their advice as non-discretionary. For fund managers who actually control the fund’s investments, the statutory fiduciary hook exists regardless.
Prohibited Transactions and the Party-in-Interest Problem
ERISA’s prohibited transaction rules are the source of the most immediate day-to-day compliance risk for fund GPs and management companies operating in plan asset territory. Those rules do not merely restrict obviously abusive conduct. They impose categorical prohibitions on defined categories of transactions between a plan and parties in interest, and the definition of party in interest is broad enough to capture nearly every entity in a real estate fund’s organizational structure.
What ERISA Section 406 Prohibits
ERISA Section 406 prohibits a fiduciary from causing a plan to engage in any transaction that constitutes a direct or indirect sale, exchange, or lease of property between the plan and a party in interest; a loan or extension of credit between the plan and a party in interest; furnishing of goods, services, or facilities between the plan and a party in interest; or a transfer or use of plan assets for the benefit of a party in interest. ERISA also prohibits fiduciaries from dealing with plan assets in their own interest or account, from acting on behalf of any party adverse to the plan in a transaction involving plan assets, and from receiving any consideration from a third party in connection with a transaction involving plan assets.
In a plan asset fund, the phrase “for the benefit of a party in interest” has sweeping implications. Because any transaction the fund enters could be deemed a transaction with each investing ERISA plan, a fund that buys or sells real property, borrows money, hires a service provider, or enters a management agreement is potentially engaging in a transaction with each of its ERISA plan investors. Any of those transactions could be a prohibited transaction if it involves a party in interest at the plan level or at the fund level.
Who Is a Party in Interest in a Real Estate Fund
The party in interest definition under ERISA Section 3(14) includes the plan’s fiduciaries and persons providing services to the plan; the employer whose employees are covered by the plan; employee organizations whose members are plan participants; persons owning 50% or more of a voting interest in the employer; and a broad range of affiliates and relatives of those categories. The consolidation of the financial services industry has extended this definition’s reach to entities with no apparent direct relationship to a plan.
For a real estate fund operating in plan asset territory, the GP, the management company, affiliated property managers, affiliated construction managers, affiliated lenders, and portfolio company affiliates are all potentially parties in interest with respect to one or more of the fund’s ERISA plan investors. A fee paid by the fund to an affiliated property manager, a loan from an affiliated entity to a fund portfolio company, or a management service agreement between the fund and the management company could all be prohibited transactions that must be covered by an applicable exemption or structured to avoid the prohibition.
The QPAM Exemption and Its 2024 Amendment
The QPAM exemption, formally PTE 84-14, is the prohibited transaction class exemption most widely relied upon by investment managers who manage ERISA plan assets in private funds. A manager that qualifies as a Qualified Professional Asset Manager and meets the conditions of the exemption can engage in a broad range of transactions with parties in interest that would otherwise be prohibited, provided the transaction is negotiated on behalf of the plan at arm’s length and in the interests of the plan.
How the QPAM Exemption Works
To qualify as a QPAM, an investment manager must be a registered investment adviser, bank, savings institution, or insurance company; must manage total client assets of at least $85 million with certain equity characteristics; and must not be subject to any of the disqualifying conditions that prevent reliance on the exemption. The QPAM exemption allows the qualifying manager to cause plan assets to be invested in a wide range of transactions, including purchases and sales of real estate, loans, and service arrangements, that would otherwise constitute prohibited transactions under ERISA Section 406.
The exemption is a significant practical tool for fund managers who operate in plan asset territory. It is also conditional: the manager must maintain its QPAM eligibility throughout the period it relies on the exemption, and the conditions must be satisfied for each transaction rather than on a general basis.
What the April 2024 QPAM Amendment Changed
The Department of Labor issued final amendments to the QPAM exemption on April 3, 2024, with an effective date of June 17, 2024. Those amendments represent the most significant changes to the exemption since it became effective in 1984, and they impose stricter qualification and compliance obligations on investment managers seeking to rely on it.
The most significant changes involve new disqualification triggers. Prior to the amendments, disqualification from QPAM status required an actual criminal conviction of the manager, a U.S. affiliate, or a 5% or more owner of the manager for certain enumerated felonies in the preceding 10 years. The amended exemption adds a new category called Prohibited Misconduct, which includes entering into a non-prosecution agreement or deferred prosecution agreement with a U.S. federal or state prosecutor’s office or regulatory agency after June 17, 2024, where the factual allegations underlying the agreement would have constituted a disqualifying criminal conviction if successfully prosecuted. Prohibited Misconduct also includes conduct determined in a final judgment or court-approved settlement to involve a systematic pattern or practice of violations of the QPAM exemption’s conditions.
The amendments also add a new notice requirement: managers relying on the QPAM exemption must notify the DOL by sending an email to QPAM@dol.gov identifying themselves as a relying QPAM. Managers relying on the exemption as of June 17, 2024 were required to send this notification by September 15, 2024. Going forward, the notification must be sent within 90 calendar days after first relying on the exemption or after changing the manager’s legal or operating name.
The practical consequence of the 2024 amendments is that managers who previously maintained QPAM status through simple registration and asset thresholds must now also monitor their affiliates’ regulatory histories more carefully, since a deferred prosecution agreement entered into by a QPAM affiliate can trigger disqualification. The expanded Prohibited Misconduct category means that conduct falling short of a criminal conviction, but resulting in a formal regulatory agreement acknowledging serious compliance failures, can eliminate the manager’s ability to rely on the exemption that many of its transactions depend on.
| ⚠️ The 2024 QPAM Amendment: What Fund Managers Need to Have Done If a fund manager has been relying on the QPAM exemption as of June 17, 2024, specific actions were required by the amendment’s deadlines. Managers who have not taken these steps should address them immediately. DOL notification. Managers relying on the QPAM exemption were required to send an email to QPAM@dol.gov by September 15, 2024, providing their legal name and any operating names. This is a one-time requirement absent a name change or cessation of reliance on the exemption. Affiliate review. The expanded disqualification triggers now reach non-prosecution agreements and deferred prosecution agreements entered into by the manager’s affiliates. Managers should have reviewed affiliate regulatory histories and should monitor for future regulatory dispositions that could trigger Prohibited Misconduct disqualification. Transaction document review. Some fund trading documents and prime brokerage agreements require that transactions be effected solely in compliance with the QPAM exemption. Managers should have reviewed those documents to determine whether they permit reliance on the Service Provider Exemption as an alternative, and renegotiated where that flexibility was absent. Future QPAM reliance. Plan fiduciaries considering investments in funds that rely on the QPAM exemption should review the amended requirements when subscribing, and should understand the consequences if the manager ceases to qualify as a QPAM during the investment period. |
Structural Strategies for Managing ERISA Exposure
Sponsors who want to accept capital from pension plans and other benefit plan investors have several structural strategies available for managing ERISA exposure. Each strategy has specific conditions that must be satisfied in practice, not just on paper, and the choice among them depends on the fund’s investment strategy, the composition of the investor base, and the operational discipline the sponsor can realistically maintain.
Staying Below the 25% Threshold
The simplest strategy is maintaining benefit plan investor ownership below 25% of each class of equity interests. This approach works, but only while the facts continue to support it. The calculation must be maintained on an ongoing basis using the correct denominator, applied class by class, and re-run after each new equity acquisition event. Transfer restrictions and subscription controls that prevent unexpected crossings of the threshold are an essential part of the compliance architecture, not an optional enhancement.
One important nuance under the Pension Protection Act of 2006: when calculating the 25% test at a downstream fund level, only the proportionate share of the upstream plan’s investment is counted, not the full amount of the upstream investment. For example, if an ERISA plan owns 30% of a private fund, and that private fund invests $2 million in a downstream fund-of-funds, only $600,000 is counted as an ERISA plan investment in the downstream fund’s 25% calculation, not the full $2 million. This proportionate counting approach reduces the upstream contagion risk that would otherwise make fund-of-funds structures unworkable for non-ERISA funds.
Real Estate Operating Company Status
For real estate funds, the Real Estate Operating Company, or REOC, exception is often the most relevant structural alternative. A REOC is excluded from the plan asset look-through even if benefit plan investors hold 25% or more of its equity interests. To qualify as a REOC, the entity must satisfy two requirements. At least 50% of the entity’s assets, valued at cost and excluding short-term investments held pending commitment or distribution, must be invested in real estate that is managed or developed by the entity with a right to substantially participate directly in management or development activities. And the entity must, in the ordinary course of its business, be directly engaged in real estate management or development activities.
The management rights requirement is not satisfied by nominal contractual provisions. The DOL has emphasized that the right to substantially participate in management or development must be meaningful, not merely window dressing in the fund documents. A fund that holds passive minority interests in joint ventures it does not control will have difficulty qualifying as a REOC, regardless of how the documents characterize the arrangement. The right to participate, and the actual exercise of that right in the ordinary course of business, are both required.
REOC compliance cannot be cured retroactively if the timing requirements are missed. A fund must satisfy the REOC requirements within the applicable testing period, and missing that window means the fund has been a plan asset vehicle during the intervening period, with all the fiduciary and prohibited transaction consequences that status produces.
Operating in Plan Asset Territory With Proper Infrastructure
Some funds choose to accept pension plan capital that crosses the 25% threshold and to operate as a plan asset fund with the full infrastructure that status requires. For managers with the capacity to implement that infrastructure, this approach allows access to the broadest possible institutional investor base.
Operating as a plan asset fund requires, at a minimum, the appointment of the fund manager as an investment manager under ERISA Section 3(38), acceptance of ERISA fiduciary status by the appropriate entities, implementation of a prohibited transaction exemption strategy such as the QPAM exemption for transactions that would otherwise be prohibited, compliance with ERISA’s fidelity bonding requirements, maintenance of indicia of ownership of fund assets within the United States, and compliance with any applicable ERISA reporting and disclosure obligations. The 2024 QPAM amendment means the QPAM eligibility must be maintained under the new conditions, including the expanded Prohibited Misconduct triggers and the DOL notification requirement.
The August 2025 Executive Order and What It Signals
On August 7, 2025, President Trump signed an executive order directing the Department of Labor to facilitate the use of alternative investment assets, such as private equity and real estate, in qualified retirement plans. The order instructed the DOL to rescind the 2021 guidance that had cautioned defined contribution plan fiduciaries that most were not suited to evaluate private equity investments in 401(k) plans. The DOL subsequently restored the 2020 guidance as the controlling position, confirming that plan fiduciaries may include alternative assets in defined contribution plan investment menus without ERISA violations solely for that reason, provided they satisfy ERISA’s prudence and loyalty requirements.
The practical significance for real estate fund managers is that the regulatory environment is becoming more favorable, not less, for pension capital flowing into private real estate funds. If the executive order’s direction leads to expanded access for 401(k) plans to invest in private real estate vehicles, the pool of potential benefit plan investors will grow. That growth increases the importance of ERISA compliance infrastructure for fund managers who want to compete for that capital without inheriting compliance obligations they are not prepared to manage.
The executive order does not change the plan asset rules, the 25% test, the REOC exception requirements, or the QPAM exemption conditions. It signals a policy preference for access, not a reduction in the rigor of the compliance framework that governs how that access works once the capital is invested.
The ERISA Analysis Belongs at the Beginning of Fund Design, Not at Subscription
The most expensive way to address an ERISA plan asset problem is to discover it after it has already occurred. A fund that has been operating as a plan asset vehicle without ERISA compliance infrastructure has likely already engaged in transactions that required prohibited transaction exemptions it did not have, paid fees in arrangements that required fiduciary analysis it did not conduct, and made investment decisions under a standard that ERISA’s duty of prudence and duty of loyalty would evaluate more strictly than the business judgment applicable to ordinary private fund management.
Getting the analysis right at fund formation means deciding, based on the anticipated investor base and the fund’s investment strategy, which ERISA framework the fund will operate under. It means designing the investor admission and transfer mechanics to maintain the chosen framework as the fund’s capitalization evolves over time. It means structuring fees, affiliate transactions, and management arrangements with ERISA’s prohibited transaction framework in mind, not as an afterthought after the LPA has already been negotiated. And it means maintaining the monitoring discipline that the regulation’s repeated measurement framework requires throughout the fund’s life.
The August 2025 executive order signals that more pension capital will be looking for access to private real estate. Fund managers who have built the compliance infrastructure to receive that capital cleanly, and who have the structural discipline to maintain it, will be better positioned to compete for institutional allocations than those who treat ERISA as a problem to solve after the subscription agreement is signed.