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Northwest OH Legal Blog

Thursday, May 1, 2014

WHY DOES YOUR PLAN NEED AN INVESTMENT POLICY GUIDELINE?

A well-run health and welfare or retirement plan should certainly maintain various policies to guide plan trustees in how their plan operates. But since “one size does not fit all,” plan policies also demonstrate to professionals who service the plan how trustees expect their plan’s unique circumstances to be handled.  One of the most essential blueprints for a plan’s successful operation is its investment policy guideline. 

Section 404(a) of the Employee Retirement Security Act (ERISA) requires that all trustees (who are also plan fiduciaries) discharge their duties according to the standard of a “prudent person” and act, “with the care, skill and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”   This essentially requires trustees to have knowledge of plan investments and monitoring activities in a manner similar to professional investment managers.  Aside from being an ERISA mandate, this standard raises the level of responsibility for all trustees, especially when they consider investment choices and performance, the hiring and evaluation of investment managers.

 

Diversifying plan assets to minimize the risk of huge losses is a major component of exhibiting prudence by plan trustees.   The Department of Labor (DOL) suggested that one way to document a plan’s diversification goals is to formalize a plan’s investment policy guideline.  Such a written guideline provides trustees and service providers, such as investment managers, with a blueprint for investment decisions.  Most written investment policy guidelines contain several common provisions which include the following:

  • Benchmarks-Each investment category should have an accompanying goal or benchmark that it is compared to and the benchmark is used as a goal for each investment’s performance review and rating;
  • Investment Performance Reviews-Each investment must be reviewed at a pre-determined time period and documented each time it is reviewed to analyze whether each investment is performing in an acceptable manner to meet plan investment goals;
  • Risk Tolerance Ranges-the plan will clearly state how much risk will be acceptable to stay within the diversification rules of plan investments.  These ranges might refer to investment categories, such as equities or fixed income investments or types of investments within categories, such as international equities or long term bonds within the fixed income category;
  • Expected Rate of Return for all Plan Investments-Not only should an acceptable range of returns be projected for each investment, an expected return for the plan, when combining all investment returns collectively, should be documented;
  • Criteria for Evaluating all Investment Managers-Expectations forprofessionals hired to recommend and manage plan investments must be clearly specified to provide pathways for periodic evaluation and investment manager selection; and
  • Proxy Voting-criteria must be established to document, not only who will vote the proxies for a plan’s investment, but also what the decision-making blueprints will be for those that do the voting.

Once these elements are established within a plan’s investment policy guideline, a very important function must be performed by trustees and service providers—the policy written as a guideline for plan investments must be followed and if necessary, changed to meet plan changes or investment goal adjustments.  When seriously drafted, approved and monitored, trustees benefit in several ways from written investment policy guidelines.  Primarily, governmental entities like the DOL, along with incoming trustees and newly hired investment managers will realize that a plan’s trustees acknowledge their great responsibility, to act according to the Prudent Person standard, when handling the investment of plan assets.  Additionally, a written investment policy guideline will provide investment managers with clear goals, acceptable practices and projected expectations for proposed and continued decisions regarding required diversification of plan assets.  Finally, by drafting and monitoring investment policy guidelines, trustees provide plan participants and beneficiaries with confidence that their funded benefits are being seriously handled in a transparent manner. 


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With offices in Toledo and Lima, OH Allotta Farley Co., L.P.A. serves clients throughout northwest OH with various legal matters. Areas of service include Allen County, Ashland County, Auglaize County, Crawford County, Defiance County, Erie County, Fulton County, Hancock County, Hardin County, Henry County, Huron County, Lucas County, Marion County, Mercer County, Morrow County, Ottawa County, Paulding County, Putnam County, Richland County, Sandusky County, Seneca County, Van Wert County, Williams County, Wood County, Wyandot County.

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