The Price of Holding Retirement Assets: QPAMs Explained

The retirement industry has become big—really big. Retirement investments valued at more than $33 trillion, according to the Investment Company Institute, now make up the largest share of U.S. corporate stock. Defined benefit and contribution plans account for more than half of that.

Major international asset managers such as Barclays, Citigroup, and JPMorgan Chase also have grown. One consequence of that interconnected web of financial institutions holding retirement assets is the potential for conflicts of interest, which are regulated by the Employee Retirement Income Security Act of 1974. The private-sector pension law prohibits transactions with any “party in interest”—including plan participants, sponsors, fiduciaries, and all those servicing the plan. Institutions often use a qualified professional asset manager exemption to help them do business.

1. What is a QPAM?

It’s a class exemption the U.S. Department of Labor gives to investment advisers, banks, savings and loans, and insurance companies of a certain size and status that allows them to do business in areas otherwise prohibited by ERISA.

Registered investment advisers that maintain at least $85 million worth of client assets under management or companies that hold at least $1 million of partners’ or shareholders’ equity generally can be classified as QPAMs. Sponsors can appoint QPAMs to manage retirement assets to avoid party-in-interest violations and absolve themselves of direct fiduciary liability.

The idea behind the class exemption is that, as long as plans are shielded by an independent and respectable asset manager that transacts an arms-length away from parties in interest, retirement plans are more or less open to the entire marketplace.

2. Why are QPAMs important?

The industry operates under a general assumption that almost all financial service firms could pose potential conflicts of interest to a retirement plan, especially since the definition of a party in interest is so broad. Qualifying as a QPAM has become standard practice for most firms wishing to hold ERISA-managed plans.

QPAM status has become so important, in fact, that it’s superseded conventional understanding of an exemption to become a kind of badge of honor, industry leaders say. Almost all major fund managers operating in the ERISA-managed space qualify as QPAMs and must maintain that class status to keep those industry contracts.

QPAMs are also a way to generate private equity or alternative investments. Private trades with ERISA-covered retirement plans would likely otherwise fall under prohibited transactions because, by their very nature, they can’t be publicly vetted for conflicts or self-dealing.

3. What is an individual exemption?

When the Labor Department proposed the QPAM exemption in 1982, it included an important caveat in the preamble: QPAMs, the department wrote, “are expected to maintain a high standard of integrity,” and, as such, they can’t have been convicted of a felony within 10 years of a qualified transaction.

This Section I(g) felony provision applies not only to the asset manager itself but to “affiliates,” including employees or other entities in which the QPAM owns a 5% interest. In a global financial marketplace, that can implicate a lot of people and corporate entities.

If a major investment bank in the U.S. owns a small South Korean affiliate, for example, a felony conviction there could put the entire company’s U.S. retirement assets at risk.

To avoid this, DOL’s Employee Benefits Security Administration offers individual exemptions that maintain an asset manager’s exemptive relief as long as that company or individual remains free of further felony convictions and can prove that QPAM status is in the best interest of the retirement assets it manages. An individual exemption often subjects the QPAM to greater agency scrutiny, such as periodic audits.

4. How are individual exemptions granted?

Individual exemptions are granted on a case-by-case basis by EBSA’s Office of Exemption Determinations.

The burden of evidence falls to the applicant, who must provide detailed descriptions of the events in question, contracts and agreements at issue, and information about the ERISA-covered assets. Evaluating that evidence can take time—sometimes upward of a year—so QPAMs tend to start the process well ahead of an anticipated conviction to avoid any gap in exemptive relief.

EBSA has granted exemptions ranging from one to 10 years, depending on the severity of the conviction and how involved the parent company was in perpetrating the crime. There’s been a measurable uptick in the total number of Section I(g) individual exemptions granted over the last 10 years, but many of those exemptions are extensions.

To learn more:

—From Bloomberg Law:

Goldman Sachs Gets Proposed Waiver to Manage Retirement Assets

DOL Offers Credit Suisse 5-Year Reprieve for Retirement Accounts

Labor Dept. Gives Relief to Five Banks Handling Retirement Money

Clock Is Ticking for Five Banks That Handle Retirement Money

Banks Get Reason for Cheer Despite Naughty Affiliates

—From Bloomberg News:

BNP Paribas Says It Will Lose Access to Some U.S. Pension Assets

UBS Gets Warning, Temporary Nod to Run U.S. Pension Money