ERISA mandates that fiduciaries of employee benefit plans follow the Prudent Investor Rule. A plan’s fiduciary has the duty to invest and manage the funds of the trust as a prudent investor (careful, cautious, sensible) would, taking into consideration the terms of the plan, distribution requirements, projected income and other circumstances. The Prudent Investor Rule states that any investment decision may be made, provided that review of that decision at a later date would indicate that the decision, in light of the circumstances at the time, was a prudent decision.

One critical step a fiduciary must take to demonstrate they are following the Prudent Investor Rule is to adopt an investment policy statement. An investment policy statement sets the investment methodology for the portfolio; documents long term goals and objectives; and establishes a frame work for hiring investment managers and/or advisors and monitoring performance.

The investment policy statement should contain the following information:

1. The type of plan, date of adoption and number of participants covered;
2. Current value of plan assets as well as assumptions of the projected contributions and distributions;
3. Asset classes appropriate for the plan;
4. Definition of risk and the plan’s tolerance for risk;
5. Nominal rate of return benchmarks;
6. How investment decisions are made and how money managers and advisors are hired;
7. How portfolio performance is monitored and how money managers are supervised;
8. The accrued and projected liabilities for defined benefit plans, which may change the funded status as the plan’s assumptions change; and
9. The investment objective in order to meet funding objectives for defined benefit plans;

An investment policy statement is just as critical to small plans as it is to large and mega plans. Establishing a clear investment policy helps fiduciaries meet pension plan objectives, comply with regulations, and establishes effective communication with investment managers.

Do you need help creating your investment policy statement? Contact Jessie Kanter, CPA or any member of our Retirement Plan Services Team to make sure you are meeting plan objectives and have a statement that includes all required information.