The trustees of a retirement plan are held to the highest standard regarding the selection of the investment options. This obligation is both a moral and a fiduciary responsibility under ERISA. A very important document, Restatement of the Law Third, gives clear guidance as to the fiduciary standards that the trustees will be held to in making investment decisions. This is the Prudent Investor Act, which clearly states that fiduciaries will be held to the highest standard of scrutiny: The Fiduciary Standard of Prudence.
Following is part of a letter written to President George W. Bush by Scott Simon and Guerdon T. Ely. This letter clearly expresses the compliance reasoning for our portfolio design. Scott Simon is a leading authority on the Prudent Investor Act and the author of The Prudent Investor Act: A Guide to Understanding.
“There is a convenient way for 401(k) plan fiduciaries to fulfill their duties of cost control and diversification. They can offer low cost, broadly diversified investment options such as index funds and structured asset class funds. Indeed, the Prudent Investor Rule (the antecedent of the Prudent Investor Act) suggests that fiduciaries should start from the presumption that passive investing is the initial standard for investing and managing trust assets. This new standard has revolutionary implications since so many ERISA fiduciaries use actively managed investment options. The Prudent Investor Rule warns explicitly about the higher costs and greater risks normally associated with active investing. Fiduciaries who insist on using active investment options may do so but only if their use can be justified by realistically evaluated return expectations. This justification is difficult, though, since identifying in advance which particular active investment product will outperform its passive benchmark is impossible. Because the future magnitude and sequence of the performance of an active investment product is unknowable relative to its passive benchmark, such products are usually selected on the basis of track record. Yet the SEC warns clearly: “Past performance is no indication of future results.” Thoughtful fiduciaries that take this warning to heart will find themselves hard-pressed to justify their selection of active investment options while excluding low cost, broadly diversified passive investment options. ERISA requires that anyone who has a say in selecting 401(k) investment options must conform to the highest standard of scrutiny: the fiduciary standard of prudence. The Enron scandal illustrates how quickly the value of a concentrated portfolio can evaporate. But something as simple as failing to identify and select low cost, broadly diversified investment options for 401(k) plans is far more insidious and widespread. ERISA fiduciaries must live up to their legal duties to avoid the attention of class-action attorneys. Perhaps more importantly, they should live up to their moral duties since they are the stewards of their employees’ financial well-being.”
As so eloquently stated above, thoughtful fiduciaries will find themselves hard pressed to justify their selection of active investment options while excluding low cost, broadly diversified, passively managed structured asset class investments. Premier Financial Group provides access to institutional investments that are aligned with the Restatement of the Law Third and The Fiduciary Standard of Prudence. This approach is in the trustees’ and the participants’ best interest.
First Chapter: Investment Philosophy
