Pension capital is attractive. It is long-term, patient, and can be substantial. For a real estate fund manager trying to build an institutional investor base, an allocation from a corporate pension plan or a university endowment can be transformative in terms of fund size, profile, and credibility.
It can also be the moment that changes the legal character of the fund entirely — if the manager has not thought carefully about ERISA before the subscription agreement is signed.
The Employee Retirement Income Security Act of 1974 does not stop at the doors of the retirement plan. When plan assets flow into a private real estate fund, federal law reaches through the fund structure and can transform an otherwise straightforward real estate investment manager into something it never intended to be: an ERISA fiduciary, subject to a fiduciary standard that demands undivided loyalty, personal liability for investment losses, and compliance with a set of prohibited transaction rules that were designed for plan administrators, not real estate sponsors.
None of that happens automatically. Whether it happens — and how to prevent it or manage it — depends on decisions that are made during fund formation, not after the capital is already in the account. This post explains the ERISA framework that applies to private real estate funds, the two primary ways sponsors avoid plan-asset status, and the fiduciary and prohibited-transaction consequences that follow when they do not.
1. The Look-Through Rule: How ERISA Reaches Into Private Funds
The Baseline and the Exception That Changes Everything
When an ERISA-covered retirement plan invests in an entity, the general rule is that the plan holds an investment in that entity — not a direct ownership stake in the underlying assets. A pension plan that buys a limited partnership interest in a real estate fund owns that interest, not the properties inside the fund. That is the intuitive result, and it is also the legally correct one in many contexts.
But the Department of Labor’s plan asset regulation carves out a significant exception. When a plan acquires an equity interest in an entity that is neither a publicly offered security nor a registered investment company interest, the plan may be treated as holding an undivided interest in the entity’s underlying assets — the actual properties, loans, and other investments inside the fund — unless an exemption applies. This is known as the look-through rule, and it is the reason ERISA demands attention during real estate fund formation.
For most private real estate funds, neither exemption from the baseline rule is available as a matter of course. The fund interests are not publicly offered securities, and the fund is not a registered investment company. So the analysis turns immediately to whether the fund qualifies for one of the specific exemptions that prevent look-through treatment. If it does not, the consequences follow automatically: every person who exercises discretionary authority or control over the fund’s underlying assets — or who provides investment advice for a fee with respect to those assets — becomes a fiduciary of the investing plan.
That is the moment when an ordinary general partner, managing member, or investment manager moves into ERISA fiduciary territory, with personal liability exposure that would not exist in any ordinary private fund.
| ⚠️ The Trigger Is Not the Size of the Pension Allocation A common misconception is that ERISA only becomes an issue when the fund has a large number of pension investors or when pension capital represents a significant share of the fund. That is not how the rule works. The plan-asset look-through is triggered by the nature of the investment — an equity interest in a non-publicly-offered, non-registered entity — not by the dollar amount. A single large ERISA plan investor can push a fund into plan-asset status just as effectively as many smaller ones, depending on which exemption the fund is relying on and how the investor’s contribution interacts with the applicable thresholds. That is why the ERISA analysis needs to happen before any retirement capital enters the fund, not as a response to the first pension plan subscription. |
Who Counts as a Benefit Plan Investor?
The 25% test and the related look-through analysis depend on identifying which investors are ‘benefit plan investors’ under ERISA section 3(42). The definition covers three categories: employee benefit plans subject to ERISA Part 4 (which includes most U.S. private-sector pension and 401(k) plans); plans subject to Internal Revenue Code section 4975 (which includes IRAs and certain other tax-favored arrangements); and entities whose own underlying assets are already plan assets because benefit plan investors hold a significant interest in them.
Equally important is what does not count: governmental plans, foreign pension plans, and church plans are generally excluded from the benefit-plan-investor definition for purposes of the 25% threshold. That is a meaningful carve-out in practice. A state pension fund or a Canadian pension plan investing in the same fund as a corporate 401(k) plan does not add to the ERISA numerator in the same way. Managers who are careful about investor composition can often accept meaningful allocations from government and foreign pension capital without affecting their ERISA status at all.
2. The 25% Test: How Funds Stay Outside ERISA Plan-Asset Status
How the Threshold Works
The most commonly used mechanism for avoiding plan-asset treatment is keeping benefit plan investor participation below 25% of each class of the fund’s equity interests. Under the plan asset regulation, participation by benefit plan investors is ‘significant’ — triggering the look-through rule — if, immediately after the most recent acquisition of any equity interest in the entity, benefit plan investors hold 25% or more of the value of any class of equity interests.
Three features of that test deserve specific attention because they are where real-world problems arise.
First, the test is applied class by class, not across the entire fund as a single pool. A fund with two classes of equity interests must satisfy the 25% threshold independently for each class. If Class A is held 20% by benefit plan investors and Class B is held 30% by benefit plan investors, the fund crosses into plan-asset territory even if the overall benefit plan participation across both classes is below 25%. Sponsors who create multiple share classes for economic or tax reasons often discover this dimension of the test only after the fact.
Second, the denominator of the calculation excludes interests held by persons with discretionary authority or control over the fund’s assets, investment advisers for a fee, and their affiliates. The sponsor’s own GP interest, if it carries discretionary control, typically falls out of both the numerator and the denominator. This is how the regulation prevents the fund manager’s own stake from distorting the threshold in either direction.
Third, and most operationally demanding: the test is retested immediately after every acquisition of an equity interest in the fund. That means the threshold is not a one-time calculation at the initial closing. It must be re-examined every time a new investor subscribes, an existing investor transfers its interest, or any other event occurs that constitutes an acquisition under the fund’s structure.
Maintaining the Buffer in Practice
Experienced fund managers rarely try to sit exactly at 24.9%. The margin is too thin. A subsequent subscription, a small capital call that changes the relative percentages, or a redemption that alters the denominator can all move the fund across the line without any deliberate action by the manager. The threshold crossing is immediate and automatic — there is no grace period and no remediation window before the consequences attach.
For that reason, most managers who rely on the 25% test build their compliance process around three practical controls: investor representations at subscription that disclose whether the investor is an ERISA plan, an IRA or other Code section 4975 account, or an entity whose assets include plan assets; transfer restrictions and prior-approval mechanisms so that the manager can retest before any new holder is admitted; and periodic cap-table monitoring that tracks the current benefit plan investor percentage for each class after every relevant event.
The mechanics of that monitoring need to be documented and operational, not theoretical. A fund that promises investors it is below the 25% threshold but has no live system for tracking investor composition is making a representation it cannot support.
| 📌 Scenario: When One Large Commitment Changes the Calculation Consider a fund that has closed with benefit plan investors holding 20% of its Class A interests. The manager is comfortably below the 25% threshold. A corporate pension plan then offers to commit an amount that would bring benefit plan participation in Class A to 27%. The moment that subscription is accepted, the fund crosses into plan-asset territory for ERISA purposes. The look-through rule applies. Every person exercising discretionary control over the fund’s underlying assets becomes an ERISA fiduciary. There is no remediation period. The consequences attach immediately. This is not a hypothetical edge case. It is a situation that arises regularly when funds raise capital opportunistically without tracking the ERISA math in advance. The right response is to either decline the full commitment, structure it so the excess sits in a different class, or satisfy a different exception — and that conversation needs to happen before, not after, the subscription is accepted. |
3. The Real Estate Operating Company Exception
What a REOC Is and Why It Matters
The second primary path to avoiding plan-asset treatment is qualifying as a real estate operating company — a REOC. If a fund satisfies the REOC definition under the plan asset regulation, it is treated as an operating company rather than a passive investment vehicle, and the look-through rule does not apply regardless of how much benefit plan capital it holds. A fund that qualifies as a REOC can accept 60%, 80%, or 100% ERISA capital without triggering plan-asset status.
That is a significant structural advantage for real estate managers whose strategy involves active management or development. It removes the ceiling on retirement capital, eliminates the continuous monitoring burden of the 25% test, and allows the fund to pursue ERISA investors aggressively without the administrative and legal friction of staying below a participation threshold.
The trade is that the operating facts have to support the exemption, year after year, through a documented testing cycle. The REOC label is earned by operating behavior, not claimed by definition.
The Two Tests: Asset Test and Management Test
To qualify as a REOC, a fund must satisfy both an asset test and a management test, and those tests must be satisfied on a continuing basis through an annual valuation cycle.
The asset test requires that on the initial valuation date — which is the date of the fund’s first long-term investment — and on at least one day during each subsequent annual valuation period, at least 50% of the fund’s assets, valued at cost and excluding short-term investments pending long-term commitment or distribution to investors, are invested in real estate that is managed or developed and with respect to which the fund has the right to substantially participate directly in management or development activities. The asset test is cost-based, not fair-market-value-based, which is a significant practical point: appreciation in existing assets does not help, and a portfolio that passes the test at cost may have different characteristics on a fair value basis.
The management test requires that during each 12-month period ending on the last day of the annual valuation period, the fund actually engages directly in real estate management or development activities in the ordinary course of its business. The right to manage is not enough. The right must be exercised.
The annual valuation period is a fixed window of not more than 90 days that begins no later than the anniversary of the initial valuation date. The fund must satisfy the asset test on at least one day within that window. Missing the window — or failing the 50% test during it because the portfolio has shifted — means the fund loses REOC status. There is no grace period for the wind-down of an REOC’s investment portfolio, which can create pressure when assets are being sold and the replacement pipeline is slow.
Active Management vs. Passive Ownership: Where Funds Get This Wrong
The most instructive guidance on what qualifies as REOC management comes from the DOL’s own examples in the plan asset regulation.
A fund that owns real estate subject to long-term leases where the tenant handles substantially all management and maintenance does not qualify as a REOC simply because it bears ownership risk. Ownership of a net-leased industrial portfolio or a triple-net retail property, where the lessee controls the property operationally, looks like a passive investment to the DOL — not an operating company.
By contrast, the regulation gives the example of a fund that owns shopping centers, retains independent contractors for day-to-day operations, supervises those contractors, and can terminate them. That fund can qualify as a REOC even though it has no employees conducting on-the-ground operations. The key is that the fund holds the authority and exercises it: supervising the work, maintaining the relationship with the contractors, and retaining the right to direct and replace them. The regulation also provides an example of a lending structure where the lender obtains rights to substantially influence property management — rights that go well beyond a conventional mortgage loan — and actually exercises those rights. That too can qualify as a REOC.
The practical principle is: passive income, active ERISA exposure. A fund strategy built around long-term triple-net leases, stabilized core assets with third-party managers and no oversight role for the GP, or loan positions with no management rights is unlikely to satisfy the REOC management test. A fund strategy built around value-add acquisitions, redevelopment, active lease-up, and hands-on property management oversight is a much stronger candidate — but only if the management activities are actually documented and occurring, not merely described as possibilities in the offering documents.
4. When ERISA Applies: Fiduciary Duties and the Prohibited Transaction Rules
Becoming an ERISA Fiduciary
Once a fund is treated as holding plan assets, every person who exercises discretionary authority or control over the management or disposition of those assets, or who provides investment advice for a fee with respect to them, is a fiduciary of each investing plan. That is not a status any real estate sponsor typically seeks, and it comes with obligations that were designed with plan administrators in mind, not private equity or real estate managers.
ERISA’s fiduciary standard requires the manager to act solely in the interest of plan participants and beneficiaries, for the exclusive purpose of providing benefits and paying reasonable plan expenses. It requires prudence in investment decisions calibrated to the standards of a person familiar with pension fund management, not just real estate investment. It prohibits self-dealing and transactions that benefit the manager at the expense of the plan. And it makes the fiduciary personally liable to restore any losses resulting from a breach of these duties and to disgorge any profits obtained through the breach.
For a real estate fund GP accustomed to charging acquisition fees, asset management fees, property management fees, and a promote, that framework creates immediate analytical challenges. Each fee stream needs to be reviewed against the ERISA fiduciary standard and the prohibited transaction rules. Each affiliate arrangement needs to be evaluated for conflicts. Each side letter needs to be assessed for consistency with the duty of loyalty to all plan investors. The ordinary mechanics of a real estate fund become legally complicated under ERISA’s exacting standards.
The Prohibited Transaction Rules
ERISA’s prohibited transaction rules go a step further than the fiduciary standard. They create a set of categorical prohibitions on transactions between the plan and ‘parties in interest,’ regardless of whether the specific transaction would benefit or harm the plan.
Parties in interest include the plan’s fiduciaries, the employer that sponsors the plan, plan service providers, and certain persons connected to those parties by ownership or family relationship. In a real estate fund context, the fund’s GP, the investment manager, and their affiliates are typically parties in interest to any plan that has invested in the fund.
The core prohibited transaction categories that most often arise in real estate funds are:
- Sales, exchanges, or leases between the plan and a party in interest. An affiliate sale of a property to the fund, or a sale of a fund property to an affiliate, raises immediate prohibited transaction concerns.
- Loans or extensions of credit between the plan and a party in interest or disqualified person. A sponsor loan to the fund, or a fund loan to an affiliate, triggers analysis.
- Services and compensation arrangements with parties in interest. Affiliated property management fees, transaction fees, broken-deal expense allocations, and monitoring fee arrangements all require careful review.
- Self-dealing and acting on both sides of a transaction. The sponsor cannot use plan assets to benefit itself or cause the plan to enter transactions in which the sponsor has a conflicting financial interest.
The penalty regime for prohibited transactions is serious and operates on two tracks. Under Code section 4975, an excise tax of 15% of the amount involved applies for each year or part of a year during which the prohibited transaction continues, with an additional 100% tax if the transaction is not corrected within the applicable period. Separately, ERISA’s civil enforcement provisions allow plans to sue for the recovery of losses and the disgorgement of profits from breaching fiduciaries, and the DOL can assess civil penalties against non-exempt prohibited transaction parties.
The QPAM Exemption: Useful but Not a Universal Solution
The most widely used exemption for managers of plan-asset funds is the Qualified Professional Asset Manager exemption, known as the QPAM exemption (Prohibited Transaction Class Exemption 84-14). A manager that qualifies as a QPAM can engage in certain transactions with parties in interest that would otherwise violate ERISA section 406(a), provided specific conditions are met.
To rely on the QPAM exemption, the manager must be a registered investment adviser, bank, insurance company, or similar regulated institution meeting defined financial thresholds. For registered investment advisers, the AUM threshold increases incrementally: for the fiscal year ending December 31, 2024, the threshold is $101,956,000, rising to $118,912,000 by the fiscal year ending December 31, 2027 and $135,868,000 by the fiscal year ending December 31, 2030. Shareholders’ or partners’ equity thresholds increase on the same schedule.
On April 3, 2024, the DOL published a significant amendment to the QPAM exemption, effective June 17, 2024. The amendment introduced several material changes that every manager relying on the QPAM exemption needs to address:
- DOL registration requirement. Managers relying on the QPAM exemption must notify the DOL by emailing QPAM@dol.gov with the legal name of each entity relying on the exemption. This is a one-time filing, required within 90 days of initial reliance. Managers that were relying on the exemption as of the June 17, 2024 effective date had until September 15, 2024 to submit their initial notice.
- Expanded ineligibility grounds. The amendment expanded the categories of conduct that render a manager ineligible to rely on the exemption, now including certain non-prosecution agreements and deferred prosecution agreements with U.S. prosecutors, certain foreign convictions (excluding countries listed as foreign adversaries by the Department of Commerce), and systematic patterns of violating the exemption’s conditions.
- One-year transition period after ineligibility. When a QPAM becomes ineligible due to a disqualifying event, a one-year transition period allows the manager to continue executing transactions for plans while seeking an individual exemption from the DOL. The ineligible QPAM must notify the DOL and each client plan within 30 days of the disqualifying event and must indemnify the plan for actual losses resulting from the loss of QPAM eligibility.
- New recordkeeping requirements. QPAMs must maintain records for six years from the date of each transaction demonstrating compliance with the exemption’s conditions.
What the QPAM exemption does not do is equally important: it does not relieve a manager of the ERISA fiduciary standard, and it does not exempt self-dealing or transactions that benefit the manager at the expense of the plan. The QPAM exemption addresses specific categories of otherwise prohibited transactions with parties in interest, but the duty of loyalty and the conflict-of-interest prohibitions remain in full force.
| ⚠️ The QPAM Exemption Does Not Cover Self-Dealing A real estate fund manager who assumes that QPAM status resolves all ERISA prohibited transaction exposure is taking a risk that ERISA does not support. The QPAM exemption covers specific categories of transactions between the plan-asset fund and parties in interest — primarily section 406(a) transactions involving sales, exchanges, leases, loans, and services. It does not exempt self-dealing under ERISA section 406(b). A manager who causes the plan-asset fund to pay fees to an affiliated entity in which the manager has a financial interest, or who uses plan assets to benefit the manager at the expense of plan participants, remains in prohibited-transaction territory regardless of QPAM status. Sponsors designing the fee and affiliate structure of a plan-asset fund need a full prohibited-transaction analysis, not just a QPAM representation letter. |
5. Structuring Real Estate Funds Around ERISA: Practical Choices
For most real estate fund managers, the ERISA analysis produces one of three structuring outcomes, and the right choice depends on the fund’s strategy, its targeted investor base, and the realistic range of benefit plan capital it expects to attract.
Option 1: Stay Below the 25% Threshold
For funds that primarily target individual accredited investors, family offices, and non-ERISA institutional investors, the most straightforward approach is to limit benefit plan participation in each class of equity to below 25% and maintain that position through disciplined monitoring and transfer restrictions. This keeps the fund outside plan-asset status without requiring REOC qualification or a full ERISA compliance program.
The cost of this approach is the ceiling it creates. If the manager later wants to pursue a large pension fund allocation that would push benefit plan participation above 25%, the fund either needs to find a different exemption or accept the ERISA consequences. Managers who anticipate growing institutional interest from the pension and endowment community should think carefully about whether the 25% path creates an artificial constraint that limits the fund’s capital-formation potential over time.
Option 2: Qualify as a REOC
For value-add, development, and operationally active real estate strategies, REOC status is often the better long-term solution. It removes the ceiling on benefit plan participation, provides flexibility to pursue large pension allocations, and aligns the legal structure with a fund strategy that already involves active management.
The requirements are real and ongoing. The fund must satisfy both the 50% asset test and the management test on the schedule prescribed by the regulation, and those tests must be documented and tracked year after year. A fund that qualifies as a REOC at its initial valuation date but subsequently shifts toward more passive, net-leased assets may lose the factual basis for the exemption at the next annual valuation period. REOC counsel opinions are typically provided to ERISA investors at the time of the fund’s first long-term investment and annually thereafter; those opinions depend on the actual operating profile of the fund, not just its stated strategy.
Option 3: Operate as a Plan-Asset Fund With ERISA Compliance Infrastructure
Some fund managers — particularly those with significant ERISA plan allocations that are essential to their capital strategy and that cannot be accommodated within the 25% threshold or a REOC structure — choose to accept plan-asset status and build the compliance infrastructure necessary to operate within ERISA’s framework.
This is the most demanding path. It requires the manager to function as an ERISA fiduciary, establish a full prohibited-transaction compliance program, obtain QPAM status and maintain compliance with the amended QPAM exemption requirements, and build fee and affiliate structures that can survive scrutiny under ERISA’s conflict rules. Not every real estate fund strategy can be operated within ERISA’s constraints, and managers who choose this path typically need dedicated ERISA counsel integrated into fund governance rather than engaged ad hoc.
| Path | How It Works / Key Considerations |
| Stay below 25% threshold | Limit benefit plan investors to less than 25% of each equity class. No plan-asset look-through and no ERISA fiduciary exposure. Requires investor representations at subscription, transfer restrictions, and active cap-table monitoring. Creates a ceiling on pension/IRA capital that may limit institutional capital formation over time. |
| Qualify as a REOC | No benefit plan investor limit once REOC status is confirmed. Look-through rule does not apply. Requires 50% of assets (at cost) in actively managed/developed real estate on initial valuation date and at least once per annual valuation period, plus actual management activity in the ordinary course. Must be maintained annually with documentation; REOC opinions typically provided to ERISA investors at first investment and annually. Best suited to value-add, development, and operationally active strategies. |
| Operate as plan-asset fund | Accept plan-asset status and build full ERISA compliance program. Manager becomes ERISA fiduciary. Requires QPAM status (including DOL registration under 2024 amendment), prohibited-transaction analysis of all fee and affiliate arrangements, and ERISA-compliant governance. Most demanding path; not suitable for all real estate strategies. Necessary when pension capital is essential and no other exemption fits. |
ERISA Is a Formation Question, Not a Fundraising Problem
The most expensive version of ERISA compliance is the version that gets addressed after the first pension plan subscription is already signed. At that point, the legal analysis is constrained by decisions that have already been made — the fund structure, the share classes, the fee arrangements, the affiliate service agreements — and retrofitting ERISA compliance onto a structure that was not designed for it is difficult, time-consuming, and sometimes impossible without material consequences for existing investors.
The least expensive version of ERISA compliance is the one that happens during fund formation. The REOC analysis requires knowing what the fund’s investment strategy actually is and whether the management facts will support the exemption. The 25% monitoring system requires building the subscription representations and transfer restriction mechanics into the fund documents before any investor is admitted. The QPAM analysis requires evaluating whether the manager meets the financial thresholds, complying with the 2024 amendment’s registration requirement, and designing the fee structure to avoid self-dealing exposure before commitments are made.
All of that is tractable when it happens before the offering documents are circulating. It is considerably less tractable when a large pension plan asks ERISA questions in the middle of a fundraise and the fund’s counsel is encountering the issue for the first time.
Real estate fund managers who expect retirement capital to be part of their investor base — even as a relatively small component initially — should treat the ERISA analysis as a standard part of fund formation, not an optional add-on triggered by the first pension plan inquiry. The questions are not complicated once they are asked early. They become complicated when they are not.
| ERISA Capital Requires ERISA Planning If you are forming a real estate fund and retirement capital is part of your investor base — or might be in the future — the ERISA analysis should be on the formation checklist from day one. That means evaluating the 25% test and the monitoring infrastructure it requires, assessing whether your strategy supports REOC qualification, analyzing the fee and affiliate arrangements under the prohibited transaction rules, and understanding the impact of the 2024 QPAM amendment if the manager expects to rely on that exemption. I work with real estate fund managers on ERISA-aware fund formation: structuring the vehicle to match the intended compliance path, building the subscription document mechanics that support investor classification and threshold monitoring, reviewing fee structures and affiliate arrangements under the applicable prohibited transaction framework, and advising on REOC qualification when the fund’s operating profile supports it. |