Valuing odd investments in an ERISA plan

BVWireIssue #128-1
May 1, 2013

A brewery, diamonds, liens, water rights—even a slaughterhouse—are the kinds of investments pension plan sponsors are adding to their portfolios, reveals an article in the New York Times. Plan sponsors like these investments because they avoid the need for cash they would otherwise have to use to plug funding gaps. Plus, if these assets yield high returns, it reduces the level of investment needed to fund the plan in full.

The ripple effect on valuation professionals is that the U.S. Department of Labor, which must approve large, in-kind pension contributions, could require the hiring of an independent fiduciary to bring in a valuation expert to assess the unusual asset, according to Susan Mangiero (Fiduciary Leadership), writing in Pension Risk Matters. “As a trained appraiser, I would tell anyone who asks that there are multiple items that must be assessed as a precursor to determining fair market value of the asset in question,” she says.

For example, if the asset has multiple owners, can the plan exercise authority over how it’s used, disposed of, and/or managed for purposes of adding to the asset's value? If others have claims on the asset, what is the plan’s pecking order if the asset throws off cash or gets sold? Since unusual assets may not trade in an active secondary venue, what is the appropriate discount for lack of marketability so that the ERISA plan does not overpay?

Watch out: The DOL wants to designate appraisers as a fiduciary for an assessment they render about an ERISA plan. This effort, along with other factors, has made pension and ESOP valuations a minefield for appraisers. To learn more, Mangiero will participate in a May 14 BVR webinar, Valuation and ERISA Fiduciary Liability: Traps for the Unwary Appraiser, along with Rob Schlegel (Houlihan Valuation Advisors) and ERISA attorney James Cole (Groom Law Group).

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