29 CFR §2550.404a-1(b)(2)(A): … a determination by the fiduciary that the particular investment or investment course of action is reasonably designed, as part of the portfolio … to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or the investment course of action ….
GIW Industries, Inc. v. Trevor, Stewart, Burton, & Jacobsen, Inc.: When investment managers make decisions, they do not view individual investments in isolation. Rather, the goal is to create a diversified portfolio that balances appropriate levels of risk and return for the investor. The risk of a given instrument is neutralized somewhat when the investment is combined with others in a diversified portfolio. The risk inherent in the entire portfolio is less than that of certain assets within that portfolio. Ideally, after diversification, only market risk remains. Likewise, the return from a portfolio over time should be more stable than that of isolated investments within that portfolio.
Restatement of Trusts 3d: Prudent Investor Rule §227: There is no defined set of asset categories to be considered by fiduciary investors. Nor does a trustee’s general duty to diversify investments assume that all basic categories are to be represented in a trust’s portfolio. In fact, given the variety of defensible investment strategies and the wide variations in trust purposes, terms, obligations, and other circumstances; diversification concerns do not necessarily preclude an asset allocation plan that emphasizes a single category of investments as long as the requirements of both caution and impartiality are accommodated in a manner suitable to the objectives of the particular trust ….
UPIA §2, (Comments): Returns correlate strongly with risk, but tolerance for risk varies greatly with the financial and other circumstances of the investor, or in the case of a trust, with the purposes of the trust and the relevant circumstances of the beneficiaries … [a]n investment that might be imprudent standing alone can become prudent if undertaken in sensible relation to other trust assets ….
UPIA §2(b): A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.
UPIA §2(c)(1 – 4 and 7): [In making decisions about investing and managing trust assets, the trustee and institution must consider such factors as]:
(1) General economic conditions;
(2) The possible effect of inflation or deflation;
(3) The expected tax consequences of investment decisions or strategies;
(4) The role that each investment or course of action plays within the overall trust Portfolio ….
(7) Needs for liquidity, regularity of income, and preservation or appreciation of capital
….
UMPERSA §10(b) (Comments Section): Subsection (b) also sounds the main theme of modern investment practice, sensitivity to the risk/return curve. Returns correlate strongly with risk, but tolerance for risk may vary with the circumstances of the retirement program or appropriate grouping of programs. A program that has a large proportion of its participants and beneficiaries near and beyond retirement age may have a lower risk tolerance than a program that has a large proportion of young participants.
UMPERSA Prefatory Note: The Act facilitates the incorporation of modern investment practices .… Five generally accepted principles of modern fiduciary investment practice are implemented …:
(1) The standard of prudence is applied to any investment as part of the total portfolio,
rather than to individual investments. In the retirement system setting, the term portfolio embraces the assets of each retirement program or appropriate grouping of programs. UMPERSA Act §10(2)
(2) The trade-off in all investing between risk and return is identified as the trustee’s central investment consideration. UMPERSA Act §10(2)
(3) All categoric restrictions on types of investments have been abrogated; the trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the program and that meets the other requirements of prudent investing. UMPERSA Act §8(a)(4).
(4) The long-familiar principle that trustees diversify their investments has been integrated into the definition of prudent investing. UMPERSA Act § 8(a)(2).
(5) The power of a trustee to delegate investment and management functions is affirmed, clarified, and subjected to safeguards. UMPERSA Act § 6.
ERISA §404(a): [fiduciaries, in fulfilling their investment duties, to take into consideration such factors as]:
(ii) The liquidity and current return of the portfolio relative to the anticipated cash flow
requirements of the plan; and
(iii) The projected return of the portfolio relative to the funding objectives of the plan.
Interpretive Bulletin 94-2: The ERISA Conference Report indicates that the purpose of the requirement for a funding policy is to enable the plan fiduciaries to determine the plan’s short- and long-run financial needs, and communicate these requirements to the appropriate persons. For example, with a retirement plan it is expected that under this procedure, the persons who manage the plan will determine whether the plan has a short-run need for liquidity (e.g., to pay benefits) or whether liquidity is a long-run goal and investment growth is a more current need. This, in turn, is to be communicated to the persons responsible for investments so that investment policy can be appropriately coordinated with plan needs.
29 CFR 2509.96-1 – Interpretive Bulletin Relating to Participant Investment Education: [t]here has been an increasing recognition of the importance of providing participants and beneficiaries, whose investment decisions will directly affect their income at retirement, with information designed to assist them in making investment and retirement-related decisions appropriate to their particular situations …. Information and materials that inform a participant or beneficiary about: … (v) determining investment time horizons ….
29 CFR §2550.404a-1(b)(2)(ii)(A–C) – Investment duties: (2) For purposes of paragraph (b)(1) of this section, “appropriate consideration” shall include, but is not necessarily limited to:
(A) Determination by the fiduciary that the particular investment or investment course
of action is reasonably designed, as part of the portfolio … to further the purposes of
the plan, taking into consideration the risk of loss and the opportunity for gain (or
other return) associated with the investment or the investment course of action; and
(B) Consideration of the following factors as they relate to such portion of the
portfolio:
(i) The composition of the portfolio with regard to diversification;
(ii) The liquidity and current return of the portfolio relative to the anticipated
cash flow requirements of the plan; and
(iii) The projected return of the portfolio relative to the funding objectives of the
plan.
Metzler v. Graham: The degree of investment concentration that would violate this requirement to diversify cannot be stated as a fixed percentage, because a fiduciary must consider the facts and circumstances of each case. The factors to be considered include (1) the purpose of the plan; (2) the amount of the plan assets; (3) financial and industrial conditions; (4) the type of investment, whether mortgages, bonds, or shares of stock or otherwise; (5) distribution as to geographical location; (6) distribution as to industries; and (7) the dates of maturity.
UPIA §2 (Comments): Subsection (b) emphasizes the consolidated portfolio standard for evaluating investment decisions, and goes on to point out that Subsection (b) also sounds the main theme of modern investment practice, sensitivity to the risk/return curve.
UPMIFA §4 (Comments): When the institution considers the purposes and duration of the fund, the institution will give priority to the donor’s general intent that the fund be maintained permanently.
UPMIFA §4(a)(1-2): In making a determination to appropriate or accumulate, the institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and shall consider, if relevant, the following factors:
(1) The duration and preservation of the endowment fund; [and]
(2) The purposes of the institution and the endowment fund ….
UMPERSA §8 (Comments): Subsection (b) also sounds the main theme of modern investment practice, sensitivity to the risk/return curve. Returns correlate strongly with risk, but tolerance for risk may vary with the circumstances of the retirement program or appropriate grouping of programs. A program that has a large proportion of its participants and beneficiaries near and beyond retirement age may have a lower risk tolerance than a program that has a large proportion of young participants.
UMPERSA §8(a)(1)(D): In investing and managing assets of a retirement system pursuant to Section 7 [of UMPERSA], a trustee with authority to invest and manage assets shall consider, among other circumstances, the expected total return from income and the appreciation of capital.
Rule 2111 – Suitability
200-2: Obtaining quantitative information and documents
300-1: Analyzing and evaluating the client’s information