Did your organization develop a detailed plan in advance of implementing your retirement plan? Were any thoughts given to the legal and fiduciary issues that surround retirement plans, or was your plan put into place given minimal considerations?

The best retirement plans encompass five critical pillars if they are to protect the organization, provide a great vehicle for employees to save for retirement, and provide a key differentiator when attracting superior talent as a catalyst for the organization to sustain growth and profitability.

Having an Investment Policy Statement (IPS) is a necessity for the organization. The purpose of an IPS is to establish the policies for administering the retirement plan and its investments. The IPS defines the following:

  • Investment Objectives
  • Investment Guidelines
  • Selection of Investment Managers and Investment Options
  • Monitoring of Investment Managers and Investment Options
  • Committee Members

The Investment Objectives and Investment Guidelines not only serve to define the types of investments that will be included in the retirement plan, but also provides a description of the asset classes the retirement plan permits as part of its investment options.

Are such asset classes as real estate and alternatives allowed as investment options? If so, which ones within each category will be included for employees? If asset classes outside of those described in the IPS are part of the investment options, the potential risk for plan fiduciaries should these investments underperform increases.

The IPS should be reviewed on an annual basis to confirm asset classes disallowed by the IPS are not part of the investment options.

The IPS also defines two critical areas: Selection of Investment Managers and Investment Options along with Monitoring of the same. The selection of investment managers and investment options should be based on an evaluation of both qualitative and quantitative factors.

Quantitative Factors can be measured by comparing to certain relevant benchmarks or peer groups to determine whether the investment option is delivering top-tier results and the investment managers have exhibited skills in delivering that performance. 

Qualitative Factors ensure the investment managers are retaining the same organizational and investment characteristics that provide them the ability to continuing adding value in the future. It includes the investment managers philosophy and process, people and resources, and consistency in the organization’s personnel.

Equally important is the monitoring of investment managers and investment options. Once a manager or investment is selected, you need a clearly defined written process to monitor the manager/investment on an ongoing basis. This process will allow you to identify substandard investment performance or adverse changes in the investment manager’s organization or process, and act in a systematic way. This helps to eliminate emotional responses that could slip into the decision process on certain investments, and will maintain uniformity in the decision process to reduce fiduciary risks.  

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