A responsible plan fiduciary wisely selects and monitors investment decisions. These decisions are supposed to be for the exclusive benefit of your employees and their beneficiaries. That includes both the providers and the investment decisions they make. To keep yourself from unnecessary scrutiny, you should prepare and adopt an investment policy statement (IPS). The Center for Fiduciary Studies views this as the most critical function a fiduciary performs.
Does an investment policy statement guide your investment decisions?
The IPS should be viewed as the business plan that guides the activities of those managing the portfolio. The IPS is a formal, long-range strategic plan that defines the management of the investment program in a logical and consistent framework. A well-developed IPS should combine elements of planning and philosophy. It demonstrates that a due diligence process was followed in selecting each investment option. It should also serve the dual purpose of applying to searches to select, as well as to monitor, each investment option.
Proper diversification is essential. When it comes to the hierarchy of investment decisions, a prudent investment expert focuses on the policy portfolio. Establishing the policy portfolio involves:
- Establishing the time horizon,
- Determining a risk level,
- Modeling an expected return,
- Making appropriate asset class selections, and
- Assuring adequate procedures for implementing and monitoring asset class selections.
Dependent or independent investment decisions
The investment policy statement forms the foundation to monitor investments and supervise the activities of the investment managers and service vendors. It is important that you use independent performance reports. It is unwise to allow your investment company to evaluate their own performance. You often hear of companies referring to star ratings, but that may not tell the whole story. Some investment companies may choose the rating system that puts them in the best light. There are several services that provide independent assessments. Your IPS should define appropriate benchmarks for each investment. The benchmarks should include such things as beta and alpha and other relevant performance metrics. Click here for example of an independent report. .
Considering the participant in the your investment decisions
Nevertheless, investment fiduciaries to participant directed defined contribution plans must allow participants the ability to invest with proper diversification. The investment steward should have sufficient information to understand the profile of the typical participant and the range of profiles found among plan participants. Equipped with this information the steward must assure that the appropriate range of asset classes are represented in the investment choices. The steward should also provide participant education and monitor the actual experience of what participants select for their investments. If the selections do not appear to be chosen wisely, consideration should be given to providing additional education, adjusting the investment menu, or making a fiduciary adviser available to render advice to participants.
Prudent experts in investment decisions
If you are responsible for implementing and monitoring investment decisions you must have the time, inclination, and knowledge to do so effectively. Global Fiduciary Precepts involves implementing the investment policy statement with appropriate prudent experts. To be afforded “the 404(a) safe harbor”, the fiduciary is required to use “prudent experts” to make the investment decisions. In addition, the fiduciary must demonstrate that the prudent experts:
- have been selected following a sound due diligence process;
- acknowledge their fiduciary status in writing; and
- are monitored.
I believe you will be well-suited by choosing an ERISA 3(21) advisor to guide you in the choice of a discretionary investment manager, discretionary trustee or an independent fiduciary. This prudent expert can help guide you to making more informed investment decisions.
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