Pension funds are patient, institutional, and willing to write large cheques. They are also one of the most dangerous LP categories for an emerging fund manager who does not understand ERISA. If benefit plan investors hold 25% or more of any class of equity in your fund, the fund's assets are treated as "plan assets" under ERISA. When that happens, the fund manager becomes an ERISA fiduciary, subject to the strictest fiduciary standard in American law, a web of prohibited transaction rules, and operational requirements that most fund structures are not built to handle [1][13].
I see managers treat the 25% threshold as a minor compliance checkbox. It is not. Getting this wrong does not just create legal risk. It can make your fund functionally inoperable for the strategies you want to run.
The 25% test
Under the Department of Labor's plan asset regulation, a fund's assets are treated as plan assets if benefit plan investors hold 25% or more of each class of equity interests [2][13]. The calculation is done class by class. If your fund has multiple equity classes, each one has to stay below 25% independently [27].
"Benefit plan investors" is broad. It covers ERISA-governed pension plans, 401(k) plans, IRAs (including self-directed IRAs), Keogh plans, and entities whose own assets include plan assets [2][27]. Importantly, government plans and most church plans are excluded from the count. Foreign pension plans are also excluded, which was a significant change made by the Pension Protection Act of 2006 [2]. That means you can raise unlimited capital from foreign and government pension plans without affecting your 25% calculation.
The fund manager's own holdings are excluded from both the numerator and denominator. So GP carry and co-investment capital do not count toward the threshold [2][27].
When the test is calculated
You have to run the 25% test at every equity transaction: initial closing, each subsequent close, any transfer of interests, and any redemption or withdrawal [2][31]. This creates a monitoring obligation that runs for the life of the fund. If an LP redeems and the remaining investor base happens to push benefit plan investors above 25%, you have a problem.
Most managers maintain a buffer. A common approach is to cap benefit plan investor participation at 20% to leave room for fluctuations [31]. Fund documents typically give the GP discretion to reject subscriptions from benefit plan investors if accepting them would breach the threshold, and in some cases to return capital if an investor's status changes [27][31].
What happens if you cross the line
If benefit plan investors exceed 25%, the fund manager instantly becomes an ERISA fiduciary. The obligations are severe:
- Duty of loyalty. You must act solely in the interest of plan participants. This prohibits self-dealing and conflicts of interest that might be permissible under the Investment Advisers Act [1][5].
- Duty of care. You must act with the skill and diligence of a prudent professional. The standard is assessed based on your process, not on whether the investment performs well [1][5].
- Prohibited transaction rules. ERISA Section 406 prohibits transactions between the plan and "parties in interest," including sales of fund assets to other funds you manage, cross-fund allocations, and affiliated service arrangements. Almost every ordinary fund operation can implicate these rules [6][18].
- Fidelity bonding. Anyone who handles plan assets must be covered by a fidelity bond equal to at least 10% of the funds handled, with a minimum of $1,000 and a maximum of $500,000 [9].
- Custody restrictions. You must maintain indicia of ownership of plan assets within US jurisdiction, which restricts the use of offshore custodians [9].
The prohibited transaction rules are the operational killer. They require you to navigate a complex exemption framework for routine fund activities. Carried interest and performance fees can trigger prohibited transaction concerns because the manager is receiving compensation from plan assets [1][18]. Getting compliant is possible, but it requires infrastructure most first-time managers do not have.
The VCOC exception
If you want to take pension capital above 25%, the venture capital operating company (VCOC) exception is the most commonly used path for VC and PE managers [3][15]. A VCOC is exempt from plan asset treatment entirely, regardless of how much pension capital it holds.
The requirements are specific. At least 50% of the fund's assets (at cost, excluding short-term investments) must be invested in operating companies where the fund has obtained contractual management rights. And the fund must actually exercise those rights with respect to at least one portfolio company during each 12-month period [3][15]. "Management rights" means contractual rights to substantially participate in or influence the management of the company: board seats, budget approval, the right to appoint officers, access to books and records [3][46].
The timing matters. The fund must qualify as a VCOC on its initial valuation date, which is the first date it makes a non-short-term investment. If you make a non-qualifying investment first, you are permanently barred from VCOC status [3][15]. This is a trap for managers who deploy capital into temporary positions before making their first qualifying equity investment.
Self-directed IRAs as a capital source
This is an area that emerging managers underuse. Self-directed IRAs are part of a $17 trillion pool of retirement capital, and they are often more flexible on track record requirements than institutional pension allocators [14]. IRA holders can include professional colleagues, executives, and entrepreneurs in your network who have accumulated retirement savings.
But IRA capital counts toward the 25% test just like any other benefit plan investor capital [14][31]. If you are targeting self-directed IRAs as 10-20% of your Fund I, that is a meaningful capital source while leaving room for institutional capital from endowments, foundations, and non-ERISA investors [14]. Go above that range without monitoring and you risk crossing the threshold.
Structuring with side letters and parallel vehicles
Most fund managers use a combination of structural tools to manage ERISA exposure:
- Side letters with ERISA investors that include confirmatory representations about the fund's 25% test status, notification provisions if the threshold is at risk, enhanced disclosure on fees and conflicts, and most-favoured-nation protections [10][29].
- Parallel vehicles that segregate benefit plan investors from other LPs. A common setup uses an onshore vehicle for US taxable investors and a separate vehicle (or feeder) for tax-exempt and ERISA investors, with both investing side-by-side in the same portfolio [21][35].
- Hard-wired conduit feeders where the feeder's only activity is investing in the master fund. All capital goes straight through, and all distributions come straight back. This narrows the scope of ERISA obligations at the feeder level, though it does not eliminate them entirely [35].
The key is to design these structures at formation. Retrofitting ERISA compliance into an existing fund is expensive and sometimes impossible without restructuring the entire vehicle.
The DOL's direction of travel
In March 2026, the DOL proposed a new safe harbour for plan fiduciaries selecting alternative assets within 401(k) plans [8][25]. If finalised, this would significantly expand the flow of retirement capital into private funds by creating a clear process-based standard for plan fiduciaries to follow. The DOL estimates $178 billion in annual allocation across 4.5 million participants [25]. For fund managers, this means more ERISA capital looking for a home, which makes getting your compliance framework right now even more important.
Separately, the DOL's 2024 Retirement Security Rule narrowed the definition of who qualifies as an investment advice fiduciary under ERISA, which reduces the risk that ordinary communications with ERISA investors will be characterised as fiduciary advice [11]. That is a helpful development, but it does not change the plan asset analysis.
How we help at Infra One
We set up and administer fund structures for emerging managers, including the structural design work needed to accommodate pension and IRA capital without triggering ERISA plan asset status. Our team handles investor onboarding with automated KYC/AML, tracks benefit plan investor percentages throughout the fund's life, and flags threshold risks before they become problems. Our fund platform is built to manage multi-vehicle structures including parallel funds and feeders.
If you are raising capital from pension plans or IRAs and want to make sure your fund structure can handle it, get in touch.
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