Last reviewed: 7 August 2026 · By Randy Mitchell, Co-Founder, Private Capital Development
U.S. pension capital brings two extra regimes. Under ERISA's plan-asset rule, benefit plan investors must stay below 25% of each equity class unless the fund qualifies as an operating company, and only U.S. corporate and union plans count toward the test. Under pay-to-play, a covered political contribution triggers a two-year compensation ban. Current as of 7 August 2026.
Educational content — not legal advice. See the full note at the end of this article.
U.S. pension money is the prize that draws most non-U.S. managers across the Atlantic or the Pacific, and it arrives carrying two bodies of law that exist nowhere else in your fundraise. The first governs what happens to your fund if too much of a certain kind of retirement money gets in. The second governs politics: who gave money to which official, and what that costs you. Neither is a reason to avoid U.S. pensions. Both are reasons to resolve two questions before your first close rather than after, because the expensive versions of these mistakes cannot be repaired later. Terms are defined as they appear; no prior acquaintance with American pension law is assumed.
ERISA is the 1974 federal statute that governs private-sector retirement plans in the United States. Its relevance to you comes through one doctrine. If retirement-plan investors ever hold too much of your fund, the law stops treating the plans as ordinary limited partners and starts treating the fund's underlying portfolio as the plans' own assets. At that point you, the manager, become an ERISA fiduciary of the investing plans.
Fiduciary status under ERISA is not a formality. It imposes duties across your whole portfolio, a prohibited-transaction regime with excise taxes that restricts dealings with affiliates, bonding requirements, and liability standards that most non-U.S. fund structures were never designed to carry. Corporate pension investors ask about plan assets at diligence because they need to know whether their commitment will push you over the line. You need to know the answer before they ask.
The threshold is this: keep "benefit plan investors" below 25% of the total value of each class of your fund's equity, and the plan-asset problem never arises.
The list of who counts is shorter than nearly everyone expects, and the surprise runs in your favor. Benefit plan investors are ERISA-covered plans (broadly, U.S. corporate pension plans and union-negotiated Taft-Hartley plans), individual retirement accounts, and funds that are themselves holding plan assets. That is the whole list.
Who does not count: U.S. state and municipal pension plans. Sovereign wealth funds. Pension plans from your own country or anywhere else outside the U.S. Church plans. A fund could be 80% CalPERS, Korean pension money, and Gulf sovereign capital without moving the needle on this test at all, because none of that is ERISA money. The 25% constraint is specifically a constraint on U.S. corporate and union pension participation. Managers who learn this late have sometimes spent months rationing the wrong investors.
One documentary warning, because you or your team may check the source: the regulation printed in the Code of Federal Regulations still reflects the pre-2006 rule and appears to count governmental and foreign plans. Congress changed the definition by statute in 2006 and the regulation was never updated. The statute controls. Anyone reading only the regulation gets this wrong, and some of the internet has.
Three mechanics decide close calls, and each one has caught real funds.
It runs per class of equity, not fund-wide. If your fund has multiple classes or series, each is tested alone, and a side class held mostly by ERISA money can fail while the fund overall looks clean.
It runs continuously. The test applies immediately after every acquisition of an equity interest: every closing, every additional subscription, every transfer. A fund comfortably under 25% at first close can be pushed over by a later admission or by non-ERISA investors redeeming out. Subscription documents manage this with caps, consent rights over transfers, and the ability to excuse or scale commitments.
Your own money makes it worse, not better. Interests held by the manager and its affiliates are excluded from the denominator. The regulation's own worked example shows a fund where plans hold what looks like 10% of the equity, yet once the general partner's interest comes out of the denominator, the plans hold 28.6% of what remains and the test fails. A large GP commitment, normally a selling point, tightens this particular constraint.
For funds that expect meaningful ERISA participation and do not want to ration it, the law offers an exception with a personality of its own. A venture capital operating company, or VCOC, is a fund that keeps at least half its assets, measured at cost, in investments that carry contractual management rights in the underlying companies, and that actually exercises those rights in the ordinary course. (A parallel category, the REOC, does the same work for real-estate funds; passively held triple-net-leased property does not qualify.)
The conditions are specific. The management rights must run directly between your fund and the portfolio company; rights held through a holding vehicle or borrowed from a co-investor do not count. Exercising rights at even one portfolio company can satisfy the exercise requirement, but the rights themselves must be real: board access, consultation rights, information rights with teeth.
The trap is timing, and it deserves its own paragraph. VCOC status is measured from the date of the fund's first genuine investment. There is no ramp-up period and no cure. A fund whose first deal is a passive minority stake with no negotiated management rights has failed the test at inception and cannot fix it retroactively, no matter what the next nine deals look like. Managers planning the VCOC route sequence their first investment for it: the deal that opens the fund is the one with the management-rights letter.
Which route fits, a hard 25% cap or VCOC engineering, depends on how much ERISA money you actually expect. That is a conversation with ERISA counsel at structuring, informed by your realistic target list, and it is far cheaper at that stage than at any later one.
Yes, it reaches you. The federal rule, adopted after a series of state pension scandals, applies to registered advisers, to exempt reporting advisers, and to foreign private advisers alike. Filing status does not matter; the rule follows the activity.
The mechanics are strict-liability and unforgiving of good intentions. If the manager or its covered personnel make a political contribution to a U.S. official who can influence a public pension's investment decisions, the manager may not receive compensation for advising that pension for two years. Small personal contributions are allowed: US$350 per official per election where the contributor can vote for the official, US$150 where they cannot. A new hire's past contributions travel with them, on a look-back of up to two years for people who will solicit investors. And the rule treats your fund as the pension's adviser for this purpose the moment you solicit the pension, before any money changes hands.
The operating discipline that follows is simple and cheap: screen political contributions for everyone who will touch U.S. public-pension fundraising, before hiring them and before any campaign season, and put contribution pre-clearance in your compliance calendar. The expensive version of this lesson involves refunding two years of fees over a four-figure donation someone forgot.
There is a further wrinkle on who may solicit a government pension for you at all: the federal rule confines paid third-party solicitation of government entities to specified regulated firms. Which connects to the state layer, where the rules get stricter and less uniform.
Because "the states ban placement agents" is a summary that will steer you wrong three different ways. The three regimes non-U.S. managers meet most often:
New York's State Common Retirement Fund prohibits investing with managers who used a placement agent or intermediary in connection with the investment, and its policy says expressly that the ban applies whether the intermediary was paid a flat fee, a contingent fee, or anything else. The policy, revised 19 March 2025, states that compliance is mandatory and will not be waived, and it reminds managers that the fund's staff are directly accessible without any intermediary. New York City's five pension systems adopted a similar ban across all asset classes in 2014.
California permits intermediaries but regulates the people. Anyone soliciting CalPERS or CalSTRS as a placement agent must register as a state lobbyist, complete ethics training, file quarterly reports, and observe gift limits, and contingent compensation for that solicitation is banned outright. Local California systems can impose the same registration requirement.
Illinois aims at the fee rather than the intermediary: compensation contingent on the outcome of a state pension's investment decision is prohibited, with fines and a multi-year ban for violations.
Three architectures: one bans the intermediary on any fee basis, one licenses the intermediary and bans the contingent fee, one bans the contingent fee alone. Before anyone makes a call to a U.S. public pension on your behalf, someone should be able to say which regime that pension sits under. Several municipal regimes also treat pension solicitation as lobbying, with their own registration requirements, so the check is system by system, not state by state.
The overlays are heaviest exactly where the checks are biggest, and both regimes reward the same habit: resolve the structural questions at formation, then let the relationship work run on a clean chassis.
In practice that means deciding the ERISA route (cap or VCOC) with counsel before first close, because both alternatives attach at the fund's first investment or first admission. It means contribution screening before the first public-pension conversation, because solicitation alone triggers the federal rule. And it means checking each target system's intermediary policy before anyone else touches the relationship, because the state regimes judge the method of approach, not just the approacher. Managers who clear pension diligence fastest are the ones for whom every answer in this article was settled months before the diligence questionnaire arrived.
What is the ERISA 25% test? If benefit plan investors hold 25% or more of any class of a fund's equity, the fund's assets become "plan assets" and the manager becomes an ERISA fiduciary. Most funds either cap benefit-plan participation below 25% per class or qualify for an operating-company exception.
Do state pension funds count toward the 25%? No. Since 2006, U.S. governmental plans, non-U.S. plans, and church plans are excluded from the "benefit plan investor" definition. Only ERISA-covered corporate and union plans, IRAs, and plan-asset entities count.
When is the 25% tested? Immediately after every acquisition of an equity interest: every close, every admission, every transfer. It is a continuous condition, and interests held by the manager and its affiliates are excluded from the denominator.
What is a VCOC? A venture capital operating company: a fund that keeps at least half its assets, at cost, in investments carrying direct contractual management rights that it actually exercises. VCOC status must be engineered from the fund's very first investment and cannot be fixed retroactively.
Does pay-to-play apply to non-U.S. fund managers? Yes. The rule covers exempt reporting advisers and foreign private advisers as well as registered advisers, and soliciting a U.S. government-entity investor for the fund triggers it. No investment is needed.
Can I use a placement agent to approach U.S. public pensions? It depends on the system. Federal rules restrict third-party solicitation of government entities to specified regulated firms; New York's state fund bars manager-retained intermediaries on any fee basis; California requires lobbyist registration for its major state systems; Illinois bars contingent fees. Check the specific system's policy before anyone makes a call.
What size political contribution triggers the two-year ban? Anything above US$350 per official per election where the contributor can vote for the official, or US$150 where they cannot, can trigger it. Screen before hiring and before giving.
Educational content only. This article explains publicly available regulation for general information, current as of the "Last reviewed" date shown above. It is not legal, tax, or compliance advice — U.S. securities law and EU marketing law each require qualified counsel, and nothing here substitutes for either. Private Capital Development LLC is not a law firm, and is not a placement agent or broker-dealer; we do not conduct regulated fund distribution in the European Union or the United States. We connect fund managers and institutional investors through relationship facilitation on a flat-fee retainer. Plan-asset analysis is structure-specific; nothing here substitutes for ERISA counsel's review of your fund documents.
About the author. Randy Mitchell is the co-founder of Private Capital Development LLC. He spent thirteen years at the U.S. Department of Commerce / International Trade Administration, from 2001 to 2014, where he organized and ran more than 150 LP/GP introductory sessions across 45 cities on six continents. He is not a lawyer, and this is not legal advice.
For managers planning a U.S. raise: CapitalConnect, multi-city U.S. roadshows built for non-U.S. managers meeting U.S. institutional investors. For ongoing U.S. relationship development: Concierge, one-to-one LP introduction support on a flat monthly retainer. We are not lawyers and this is not a compliance service: we handle the relationship side while your counsel handles the regulatory side.