The Government Accountability Office on Wednesday, September 10, called on the Department of Labor to provide guidance for defined-benefit plan investments in hedge funds and private equity so fund executives understand the challenges and risks of those asset classes.

The GAO report recommended that the guidance include a description of the steps that funds should take to address the challenges and risks of the alternative investments while meeting their fiduciary obligations under ERISA.

The guidance should also specifically address the challenges that alternative investments present for smaller pension plans, the report said.

In a July 16 letter of response attached to the GAO report, Bradford P. Campbell, assistant secretary of the DOL’s Employee Benefits Security Administration, said ERISA already charges plan fiduciaries with investing prudently.

Campbell said in the letter that providing additional guidance would be difficult because “there is no statutory definition of hedge fund or private equity fund, and investment objectives and strategies may vary greatly among these funds.”

The GAO responded to Campbell in the report, saying: “The lack of uniformity among hedge funds and private equity funds is itself an important issue to convey to fiduciaries, and highlights the need for an extensive due diligence process preceding any investment.”

“It is crucial that we take great care as pensions invest more in hedge funds and private equity,” Sen. Max Baucus, D-Montana, said in a news release. “If the pension investments sour, the retirement savings of millions of Americans could suffer.”

Baucus requested the GAO report.

Filed by Doug Halonen of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

Workforce Management's online news feed is now available via Twitter.