What Capital Raisers Need to Know About ERISA and Plan Assets
Raising capital from retirement accounts (such as Self-Directed IRAs, Solo 401(k)s, and other retirement plans) has become increasingly common in private real estate offerings. These investors represent a large and growing source of capital for syndicators and private fund managers.
However, when retirement funds invest in private offerings, a specific ERISA regulation known as the “25% Rule” can come into play.
Understanding this rule is essential for sponsors raising capital and for retirement investors participating in private placements.
This article explains:
- What the 25% rule is
- When it applies to private funds and syndications
- How capital raisers track it operationally
- Why it sometimes does not apply to real estate investments
What Is the ERISA 25% Rule?
The 25% rule originates from the Department of Labor’s Plan Asset Regulation (29 CFR §2510.3-101) under ERISA.
The rule determines whether a private investment fund’s assets are considered “plan assets” when retirement plans invest in the fund.
The basic rule:
A private investment entity must ensure that less than 25% of each class of equity interests is held by Benefit Plan Investors.
If the threshold is exceeded:
- The fund’s underlying assets become plan assets
- The manager may be treated as an ERISA fiduciary
- ERISA fiduciary and prohibited transaction rules apply to the entire fund
For most real estate sponsors, this creates additional regulatory complexity they prefer to avoid.
Who Counts as a Benefit Plan Investor?
For purposes of the 25% rule, Benefit Plan Investors typically include:
- ERISA pension plans
- Individual Retirement Accounts (IRAs)
- Keogh plans
- Certain entities whose assets include ERISA plan money
Because self-directed IRAs are included in this definition, the rule is highly relevant for sponsors accepting capital from retirement investors.
How the 25% Rule Is Calculated
The rule is applied separately to each class of equity interests in the fund.
Most commonly, the calculation is based on capital commitments, not net asset value.
For example:
| Investor Type | Capital Commitment |
| Cash investors | $8,000,000 |
| Retirement accounts | $2,000,000 |
Retirement capital = 20%
In this case, the fund passes the 25% test.
However, if retirement capital reached $3,000,000, the percentage would rise to 30%, and the fund could become subject to ERISA plan asset rules.
Operational Monitoring of the 25% Threshold
Monitoring the 25% rule is largely an operational process handled by the fund manager or issuer.
Typically:
- Investor status is captured during the subscription process
Investors disclose whether they are investing through a retirement account. - Capital commitments are tracked internally
Many sponsors use spreadsheets or investor management software to track:- investor name
- commitment amount
- retirement plan status
- percentage of Benefit Plan Investors
- The calculation is updated at key events, including:
- final closing
- admission of new investors
- transfers of ownership interests
- notice of changes in investor status
To reduce the risk of accidental noncompliance, many sponsors maintain a buffer below the 25% threshold, often targeting 20–24% retirement capital.
Fund documents also typically grant the general partner authority to reject subscriptions or take corrective action if the threshold is at risk of being exceeded.
When the 25% Rule Does NOT Apply
There is an important exception to the rule.
If the investment entity qualifies as an Operating Company, the plan asset regulations may not apply.
Two common operating company exemptions are:
- Venture Capital Operating Companies (VCOCs)
- Real Estate Operating Companies (REOCs)
For real estate sponsors, the REOC exemption is the most relevant.
The Real Estate Operating Company (REOC) Exception
A fund can qualify as a Real Estate Operating Company (REOC) if it meets specific requirements, including:
- At least 50% of the fund’s assets are invested in real estate, and
- The entity actively manages or develops the properties
When a fund qualifies as a REOC:
- The entity is treated as an operating company
- The underlying real estate is not considered plan assets
As a result:
The 25% limitation does not apply.
Why Many Real Estate Syndicators Still Follow the 25% Rule
Even though the REOC exemption exists, many real estate sponsors choose not to rely on it.
That’s because:
- The REOC test requires ongoing operational activity
- Passive real estate investments may not qualify
- The determination can be fact-specific and legal-intensive
- Sponsors often prefer the simpler compliance approach
Instead, most private real estate offerings simply maintain retirement investors below the 25% threshold.
This approach reduces legal complexity and provides a clear compliance framework.
Why This Matters for Self-Directed IRA Investors
For investors using Self-Directed IRAs, the 25% rule is typically not their responsibility to track.
Instead, it is the issuer or fund sponsor’s responsibility.
However, understanding the rule helps retirement investors:
- recognize why some sponsors limit IRA participation
- understand capital raising dynamics in private funds
- appreciate how ERISA rules intersect with private real estate investing
Final Thoughts
Retirement capital plays a growing role in private real estate investing. But when retirement accounts participate in private offerings, ERISA regulations (including the 25% rule) can affect how those deals are structured.
In general:
- If Benefit Plan Investors hold less than 25% of a fund’s equity, the fund avoids ERISA plan asset treatment.
- If the fund qualifies as a Real Estate Operating Company (REOC), the 25% rule may not apply at all.
Because these rules can significantly affect fund structure and compliance obligations, most sponsors work closely with securities and ERISA counsel when raising capital from retirement accounts.
About Self-Directed IRA Investing
Self-Directed IRAs allow investors to use retirement funds to invest in alternative assets such as:
- real estate
- private placements
- syndications
- private lending
- venture capital
When structured correctly, these investments can provide tax-advantaged exposure to private markets that are typically unavailable in traditional retirement accounts.
Contact Us:
Whether you want to invest in real estate, crypto, or private companies, we can help you get started with a self-directed IRA. We’re here to help you stay compliant while you grow your retirement wealth confidently and intelligently.
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