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Glossary · Operations and rules

What is the ERISA 25% test?

Under the ERISA 25% test, a fund’s assets are generally not treated as plan assets if benefit plan investors hold less than 25% of any class of its equity.

In practice

The test is applied class by class and is measured at each acquisition or redemption of an interest, not only at closing. Interests held by the GP and its affiliates with discretion over fund assets are usually excluded from the calculation. It is the main alternative to qualifying as a venture capital operating company (VCOC) or real estate operating company (REOC). LPAs typically include covenants to monitor it.

An example

Round numbers, not a real fund

Say a fund has $400 million of commitments in one class. If benefit plans commit $100 million or more, they hold 25% or more, and the manager must plan around that.

Why it matters

Staying under it spares a manager the fiduciary rules that would otherwise apply to the fund’s own assets.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.