In general, it provides that that the prudent man standard is  satisfied if the fiduciary has given appropriate consideration, among other facts and  circumstances, to the following factors (1) the composition of the plan portfolio with regard  to diversification of risk; (2) the volatility of the plan investment portfolio with regard to  general movements of investment prices; (3) the liquidity of the plan investment portfolio  relative to the funding objectives of the plan; (4) the projected return of the plan  investment portfolio relative to the funding objectives of the plan; and (5) the prevailing  and projected economic conditions of the entities in which the plan has invested and  proposes to invest. To date, Labor has not implemented this  recommendation. In responding to GAO’s 2008 recommendation, Labor  noted that while it would consider the recommendation, the lack of  uniformity among hedge funds and private equity funds could make  development of comprehensive and useful guidance difficult. Selected Pension Plans Reported Mixed Experiences with Hedge Funds and Private Equity Investments, and Some Faced Significant Losses and Other Challenges

		Hedge Fund and Private Equity Investments Were Affected by the Financial Crisis, but Most Selected Plans Indicated These Investments Met Expectations

Hedge fund and private equity indexes show that these investments were  significantly affected by the financial market turbulence of recent years,  and plans and experts we contacted indicated that pension plan  investments were not insulated from losses. Given these reasons for  investing in hedge funds, most of the 22 plan representatives we  interviewed for this report said that these investments met plan  expectations (see table 2 for an overview of the responses). In contrast, a number of plan sponsor representatives and experts noted  that hedge funds did not perform as expected. Given the long-term nature of private equity investments,  nearly all of the 22 pension plan representatives we interviewed were  generally satisfied with their private equity investments over the last 5  years. A representative from one plan, for example,  remarked that the plan’s venture capital investments did not perform well. Some Selected Plans Faced Specific Challenges with Hedge Fund and Private Equity Investments in Recent Years

Pension plan representatives we contacted experienced some challenges  in hedge fund and private equity investing beyond those of more  traditional investing, including limited liquidity and transparency, and the  negative impact of the actions of other investors in the fund—sometimes  referred to as co-investors. Consequently, a few plans had to look for liquidity in their portfolio in  order to fund capital commitments. However, they were unable to do so, because the fund manager  had imposed a discretionary gate to prevent further losses. Plans Continue to Invest in Hedge Funds and Private Equity, but Some Plan Sponsors Have Taken Steps to Address Challenges

Available data reveal that plan investments in hedge funds and private  equity have continued to increase, and our contacts with 22 public and  private defined benefit (DB) plan sponsors also reveal a continued  commitment to these investment vehicles. Nonetheless, some plans have  reduced their allocations or made significant changes to their strategic  approach as a result of experiences in recent years. According to a Pensions & Investments survey, the percentage of large  plans (as measured by total plan assets) investing in hedge funds grew  from 47 percent in 2007 to 60 percent in 2010 (see fig. Most Plans Have Modified Investment Strategies in Recent Years

Experiences of recent years have led most plans we contacted to make  significant changes to their hedge fund or private equity strategies, and in  three cases, reductions in the overall allocation to hedge funds or private  equity. According to industry press, this technique largely fell out  of favor as a result of substantial investment losses during the 2008-2009  financial crisis. More advantageous fee terms. Further, plan  representatives and some experts indicated that not all plans would be  able to take the steps described above. In 2009, the President’s Working Group on Financial  Markets issued a report detailing important considerations and best  practices for hedge fund investors, including specific guidance for  fiduciaries. In 2011, the ERISA Advisory Council specifically revisited the issue of  pension plans’ investments in hedge funds and private equity. In 2008, we recommended that the Secretary of Labor issue guidance  designed for qualified plans under ERISA concerning alternative  investment practices. What steps have federal agencies and other entities taken to help  plan sponsors make and manage investments in such alternative  assets, and what additional steps might be warranted? Specifically, we asked how pension plans’ hedge fund and private equity  investments have performed; lessons learned with respect to pension  plan hedge fund and private equity investments; changes to pension plan  hedge fund and private equity investment practices; the extent to which  pension plans observe best practices in hedge fund and private equity  due diligence; and actions federal agencies, such as Labor, should take  to ensure that pension plan fiduciaries better make and manage their  hedge fund and private equity investments.
Why GAO Did This Study

Millions of Americans rely on defined benefit pension plans for their financial well-being in retirement. Plan representatives are increasingly investing in a wide range of assets, including hedge funds and private equity funds. In recent years, GAO has noted that plans may face significant challenges and risks when investing in these alternative assets. These challenges and ongoing market volatility have raised concerns about how these investments have performed since 2008.
As requested, to better understand plan sponsors experiences with these investments, GAO examined (1) the recent experiences of pension plans with investments in hedge funds and private equity, including lessons learned; (2) how plans have responded to these lessons; and (3) steps federal agencies and other entities have taken to help plan sponsors make and manage these alternative investments.
To answer these questions, GAO analyzed available data; interviewed relevant federal agencies and industry experts; conducted follow-up interviews with 22 public and private pension plan sponsors selected among the top 200 plans and contacted in the course of GAOs prior related work; and surveyed 20 plan consultants, academic experts and other industry experts.
This report reemphasizes a 2008 recommendation that the Secretary of Labor provide guidance to help plans investing in hedge funds and private equity.

What GAO Found

While plan representatives GAO contacted generally stated that their hedge fund and private equity investments met expectations in recent years, a number of plans experienced losses and other challenges, such as limited liquidity and transparency. National data indicated that hedge fund and private equity investments were significantly affected by the 2008-2009 financial crisis, and plans and experts GAO contacted indicated that pension plan investments were not insulated from losses. Most of the 22 plan representatives GAO interviewed said that their hedge fund investments met expectations overall, despite, in some cases, significant losses during the financial crisis. A few plan representatives, however, expected hedge fund investments to be much more resilient in turbulent markets, and found the losses disappointing. Given the long-term nature of private equity investments, almost all of the representatives were generally satisfied with these investments over the last 5 years. Some plan representatives described significant difficulties in hedge fund and private equity investing related to limited liquidity and transparency, and the negative impact of the actions of other investors in the fundsometimes referred to as co-investors. For example, representatives from one plan reported they were unable to cash out of their hedge fund investments due to discretionary withdrawal restrictions imposed by the fund manager, requiring them to sell some of their stock holdings at a severe loss in order to pay plan benefits.
Most plans included in our review have taken actions to address challenges related to their hedge fund and private equity investments, including allocation reductions, modifications of investment terms, and improvements to the fund selection and monitoring process. National data reveal that plans have continued to invest in hedge funds and private equityfor example, one survey revealed that the percentage of large plans investing in hedge funds grew from 47 percent in 2007 to 60 percent in 2010and most plans GAO contacted have also maintained or increased their allocations to these investments. However, most plans have adjusted investment strategies as a result of recent years experiences. For example, three plans have reduced their allocations to hedge funds or private equity. Other plan representatives also took steps to improve investment terms, including more favorable fee structures and enhanced liquidity. However, some plan representatives and experts indicated that smaller plans would likely not be able to take some of these steps.
The Department of Labor has provided some guidance to plans regarding investing in derivatives, but has not taken any steps specifically related to hedge fund and private equity investments. In recent years, however, other entities have addressed this issue. For example, in 2009, the Presidents Working Group on Financial Markets issued best practices for hedge fund investors. Further, both GAO and a Department of Labor advisory body have recommended that the department publish guidance for plans that invest in such alternative assets. To date, it has not done so, in part because of a concern that the lack of uniformity among such investments could make development of useful guidance difficult. In 2011, the Department of Labor advisory body specifically revisited the issue of pension plans investments in hedge funds and private equity, and a report is expected in early 2012.