Author: Paul A. Carl, CHSA, CPFA^™ Vice President, Retirement Plan Consulting, Registered Representative

Back in the “old days” when I was with the Department of Labor, most of the retirement plans we reviewed were still managed under a single investment objective. During one investigation particularly, we cited a bank trust department for several violations of ERISA. The bank trust department had invested the assets of clients’ plans into the common stock of a widely-held, publicly traded company that enjoyed a positive return of more than 50% during the measured period. So why did we find ERISA violations if the investment had performed so well? The bank had created an excessive concentration (think diversification) in this one stock for many of their retirement plan clients’ portfolios. Further, we had uncovered expressed evidence that the bank’s decision to invest was more emotionally driven than arrived at through the institution’s stated normal investment due diligence processes. 

From an employer viewpoint, populating the investment menu with the “right” investment options, whether they are mutual funds, collective investment trusts (commonly called “CITs”), or a combination, should reflect a due diligence process that is fiduciarily sound. A best practice to help establish this due diligence process is to adopt an Investment Policy Statement (commonly called the “IPS”). Plan fiduciaries, including the ERISA 3(21) investment advisor and 3(38) investment manager, should be able to rely on the IPS to provide investment guidelines in a meaningful way. 

Overall, an IPS should cover several key factors:

• The plan’s overall investment philosophy and objectives
• Appropriate menu construction 
• The types of investments to be used to populate the investment menu
• The factors to apply in selecting an acceptable investment
• The circumstances used to determine when an investment should be placed on watch and when it should be removed

In addition to these key factors, the IPS should not be too constraining. Too much detail can be as inefficient to the investment process as too little. Thus, it’s important to periodically evaluate and, as applicable, revise the IPS to ensure that it is meeting and will continue to meet the needs of its governing fiduciaries who ultimately serve the plan participants. 

Do you have an Investment Policy Statement for your plan?

HORAN Capital Advisors, LLC is an SEC registered investment advisor. The information herein has been obtained from sources believed to be reliable but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HCA and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.