ERISA Section 404(a) (Preamble): The Department is of the opinion that (1) generally, the relative riskiness of a specific investment or investment course of action does not render such investment or investment course of action either per se prudent or per se imprudent, and (2) the prudence of an investment decision should not be judged without regard to the role that the proposed investment or investment course of action plays within the overall plan portfolio …. Under the “prudence” rule, the standard to which a fiduciary is held in the proper discharge of his investment duties is defined, in part, by what a prudent person acting in a like capacity and familiar with such matters would do. Thus, for example, it would not seem necessary for a fiduciary of a plan with assets of $50,000 to employ, in all respects, the same investment management techniques as would a fiduciary of a plan with assets of $50,000,000.
ERISA §404(a)(1)(C): A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries … by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so ….
ERISA Section 404(a)(1)(C) (1974 Conference Report on ERISA): 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 purposes 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.
DOL Interpretive Bulletin 96-1: Asset allocation models must be based on generally accepted theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over defined periods of time …. This requirement was included to ensure that any models or materials presented to participants or beneficiaries will be consistent with widely accepted principles of modern portfolio theory, recognizing the relationship between risk and return, the historic returns of different asset classes, and the importance of diversification.
Leigh v. Engle: 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.
UPIA §2 (Comments): The Drafting committee declined the suggestion that the Act should create an exception to the prudent investor rule (or to the diversification requirement of Section 3) in the case of smaller trusts.
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(e): A trustee may invest in any kind of property or type of investment consistent with the standards of this [Act].
UPIA §3 (Comments): Diversification reduces risk … [because] stock price movements are not uniform. They are imperfectly correlated. This means that, if one holds a well-diversified portfolio, the gains in one investment will cancel out the losses in another …. As long as stock prices do not move exactly together, the risk of a diversified portfolio will be less than the average risk of the separate holdings.
UPIA §3 (Comments): Transaction costs such as the round lot (100 share) trading economies make it relatively expensive for a small investor to assemble a broad enough portfolio to minimize uncompensated risk. For this reason, pooled investment vehicles have become the main mechanism for facilitating diversification for the investment needs of smaller trusts.
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. Although the Act does not require that a specific amount be set aside as “principal,” the Act assumes that the charity will act to preserve “principal” (i.e., to maintain the purchasing power of the amounts contributed to the fund) while spending “income” (i.e., making a distribution each year that represents a reasonable spending rate, given
investment performance and general economic conditions).
ERISA §402(a)(1): Every employee benefit plan shall be established and maintained pursuant to a written instrument.
ERISA §404(a)(1): … a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and …
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV.
29 CFR §2509.94-2(2): [t]he maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA §404(a)(1)(A) and (B) …. For purposes of this document, the term “statement of investment policy” means a written statement that provides the fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions …. A statement of investment policy is distinguished from directions as to the purchase or sale of a specific investment at a specific time ….
DOL Interpretive Bulletin 94-2: [Investment policy statements] serve a legitimate purpose in many plans by helping to ensure that investments are made in a rational manner and are designed to further the purposes of the plan and its funding policy.
DOL Interpretive Bulletin 94-2: While this regulation states only that a written investment plan is “consistent” with ERISA’s fiduciary duty requirements, in the circumstances here, absence of any plan constitutes a breach of fiduciary duty …. Statements of investment policy … would be part of the documents and instruments governing the plan within the meaning of ERISA §404(a)(1)(D).
UMPERSA §8(b): A trustee with authority to invest and manage assets of a retirement system shall adopt a statement of investment objectives and policies for each retirement program or appropriate grouping of programs. The statement must include the desired rate of return on assets overall, the desired rates of return and acceptable levels of risk for each asset class, asset-allocation goals, guidelines for the delegation of authority, and information on the types of reports to be used to evaluate investment performance. At least annually, the trustee shall review the statement and change or reaffirm it.
400-1: Identifying and evaluating financial planning alternative(s)
400-2: Developing the financial planning recommendation(s)
400-3: Presenting the financial planning recommendation(s)