# ERISA — Benefit Plan Investor Rules

## What It Is

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law governing employee benefit plans (pensions, 401(k)s, IRAs). When benefit plan money invests in a private fund, the fund's assets can become "plan assets" under ERISA, triggering fiduciary duties, prohibited transaction rules, and DOL oversight.

The key regulation is the DOL's Plan Asset Regulation (29 CFR 2510.3-101, as modified by ERISA Section 3(42)).

## The 25% Threshold

A fund's assets become ERISA "plan assets" if benefit plan investors hold 25% or more of any class of equity in the fund. If plan assets rules apply:

- The fund manager becomes an ERISA fiduciary
- Every fund transaction must comply with ERISA's prohibited transaction rules
- The manager must meet ERISA's prudence, loyalty, and diversification standards
- The manager needs a fidelity bond and potentially an ERISA audit

### What Counts as a Benefit Plan Investor

- Corporate pension plans
- 401(k) plans
- Keogh plans (for self-employed)
- IRAs (including self-directed IRAs)
- Certain insurance company general accounts

### What Does NOT Count

- Government plans (state/local pension funds)
- Foreign plans (Korean pension funds, NPS)
- Church plans
- Personal savings that are not in a retirement vehicle

### Calculating the 25%

- Numerator: aggregate equity held by benefit plan investors
- Denominator: total equity in the fund (excluding the manager's equity interest)
- The manager's own investment is excluded from the denominator
- Each class of equity is measured separately

## How It Applies to Palace Fund

Palace Fund has primarily Korean investors. Key considerations:

- **Korean pension/retirement money**: Korean National Pension Service (NPS) money and Korean retirement accounts are foreign government or foreign plans, which are NOT benefit plan investors. They do not count toward the 25% threshold.
- **US-based benefit plan investors**: If any investor invests through a US IRA, 401(k), or pension, that counts.
- **Low risk if investor base is mostly Korean nationals**: Unless US-based retirement accounts are investing, the 25% threshold is unlikely to be triggered.

## Exemptions Even If Over 25%

If the fund somehow exceeds 25% benefit plan investors, certain exemptions exist:

- **Venture Capital Operating Company (VCOC)**: Must hold and exercise management rights in operating companies. Not applicable for a public equities fund.
- **Real Estate Operating Company (REOC)**: Not applicable.
- **Qualified Professional Asset Manager (QPAM)**: Requires registration as an investment adviser with the SEC and managing substantial AUM. Unlikely for a small fund.

## Action Items

1. **Include ERISA representations in subscription documents**: Require each investor to disclose whether they are investing benefit plan assets (IRA, 401(k), pension).
2. **Track benefit plan investor percentage**: Maintain a register that calculates benefit plan investor equity as a percentage of total fund equity (excluding manager's interest).
3. **Set a buffer below 25%**: Consider capping benefit plan investors at 20% to maintain a safety margin.
4. **Restrict or reject benefit plan capital if approaching the threshold**: The operating agreement should give the manager discretion to refuse subscriptions that would push the fund over the limit.
5. **Korean retirement money is not a concern**: Document that Korean pension/retirement accounts are foreign plans and do not count.

## Key Takeaway

For a small fund with primarily Korean investors, ERISA is low risk but must be monitored. The main danger is accepting capital from US-based IRAs or 401(k)s without tracking the percentage. Include disclosure requirements in subscription documents and track the number.