Private fund managers are increasingly turning to retirement accounts, including self-directed IRAs, to raise capital.
Retirement assets represent one of the largest and most durable sources of investable capital, making them an appealing resource for issuers seeking long-term funding. At the same time, accepting retirement capital introduces structural considerations that are important to address before the first subscription is accepted.
One of the most important aspects to consider is the ERISA plan asset rule. This rule determines whether a fund’s underlying assets are treated as retirement plan assets and, as a result, whether the fund manager is treated as an ERISA fiduciary. Most private funds are structured to avoid that outcome, but doing so requires thoughtful fund design, clear subscription language, and consistent monitoring throughout the life of the fund.
This article overviews:
- How the plan asset rule applies to private funds
- How the 25 percent exemption works in practice
- How issuers typically monitor plan asset exposure when raising capital from ERISA plans and IRAs.
How the ERISA plan asset rule works in private funds
The plan asset rule governs when the assets of a private fund are treated as “plan assets” under ERISA and related tax rules. If a fund is deemed to hold plan assets, the fund manager becomes an ERISA fiduciary with respect to the fund’s assets.
ERISA fiduciary status imposes heightened duties of care and loyalty and introduces prohibited transaction restrictions that can materially affect fund operations. These restrictions can impact fee arrangements, affiliated service providers, conflict management, and common compensation structures. Because of this, most private fund sponsors structure their funds to avoid plan asset treatment unless they are intentionally operating within an ERISA framework.
For the purposes of this analysis, regulators focus on a category called Benefit Plan Investors. This group includes ERISA-covered retirement plans as well as plans subject to prohibited transaction rules under the Internal Revenue Code, including IRAs and Keogh plans. Although IRAs are not ERISA plans, they are treated as Benefit Plan Investors for plan asset purposes. Governmental plans and most church plans are excluded.
The 25 percent exemption
Most private funds avoid plan asset status by relying on the 25 percent exemption. Under this exemption, a fund’s assets are not considered plan assets if Benefit Plan Investors hold less than 25 percent of each class of the fund’s equity interests. Interests held by the general partner and its affiliates are excluded from the calculation. Other exemptions exist, but they come with operational and compliance requirements that make the 25 percent exemption the most practical option for many issuers.
The 25 percent test is applied separately to each class of equity interests and is most commonly measured using capital commitments rather than net asset value. Only capital attributable to Benefit Plan Investors, including IRAs, is included. Commitments from the general partner and its affiliates are excluded.
Additional complexity arises when capital is invested through entities such as feeder funds, special purpose vehicles, or funds-of-funds. In those cases, issuers may need to look through the investing entity. If 25 percent or more of the entity’s ownership is attributable to Benefit Plan Investors, the entity itself is treated as a Benefit Plan Investor at the fund level.
Monitoring the test is primarily an operational process. Retirement status is captured at the subscription stage through standardized investor representations. Funds then track commitments internally, often using a centralized spreadsheet that identifies each investor, their commitment amount, their plan status, and the resulting percentage attributable to Benefit Plan Investors.
The calculation is updated at predictable points, including final closing, the admission of new investors, requested transfers, or notice of a change in an investor’s plan status. Many issuers maintain an internal buffer below the threshold to reduce the risk of crossing 25 percent unintentionally. Fund documents typically give the general partner authority to reject subscriptions or take corrective action if needed to preserve compliance.
Why staying below 25 percent matters
If a fund exceeds the 25 percent limit, the consequences are immediate. The fund’s assets are treated as plan assets by operation of law, and the fund manager becomes an ERISA fiduciary with respect to the entire fund.
Fiduciary duties and prohibited transaction rules then apply across all fund assets, not just the portion attributable to retirement investors. This can restrict management fees, carried interest, affiliated transactions, and other routine fund practices. While remediation options may exist, they are often complex, time-sensitive and uncertain.
As a result, most plan asset issues are addressed through preparation rather than correction. Clear subscription disclosures, disciplined tracking, and defined authority in fund documents allow issuers to raise retirement capital while maintaining operational flexibility.
Building durable access to retirement capital
Raising capital from retirement investors can be a meaningful way to broaden access to private markets, but it also requires the right infrastructure and discipline. Platforms like Alto work alongside issuers to help make retirement investing in private funds straightforward, efficient and operationally sound, from supporting accurate investor disclosures to enabling ongoing visibility into retirement capital participation. When plan asset considerations are understood and managed early, issuers are better positioned to scale their funds with confidence and meet investor demand responsibly.
