Benefit Plan Policies: Essential Components of Your Plan’s Investment Policy

Larry Beebe, CPA

In this series, we are reviewing the written plan policies needed to help your benefit plan stay compliant and operate most effectively. For a full list of the necessary policies and why your plan should implement them, click here.

A well-written investment policy is essential for keeping your plan in compliance, as the Department of Labor (DOL) stipulates that benefit plans must have one. This policy shows that plan fiduciaries are acting prudently in the investment arena and that the risk of substantial losses is properly minimized through a commitment to asset diversification.

Here are nine key points your plan’s investment policy should address:

  1. Investment objectives, including the desired rate of return as assumed by the plan and its actuary.
  2. Permissible and non-permissible asset classes. Some plans restrict investments to publicly held securities; other plans usealternative investments such as real estate, hedge funds, limited partnerships and private equities.
  3. Diversification objectives. This section of the policy should detail what the plan wants to accomplish by diversifying its investment holdings.
  4. Ranges for each type of investment. Having a lower and upper percentage limit for each type of investment helps your investment advisor stay within the allocation guidelines established by the policy.
  5. Benchmarks. Each investment your plan has should have an established benchmark that can be used to measure the success of the investment. The benchmark used for each investment should be established and known when the investment is made.
  6. Expected rate of return. This should be detailed for each investment type.
  7. Criteria for evaluating investment managers. Your investment managers and trustees should know and understand, in advance, the criteria which will be used to measure performance.
  8. Review of the investment performance. The policy should detail how and how often the performance of your investment managers will be evaluated to ensure you are getting the necessary returns.
  9. Proxy voting. Within your policy, define who votes the proxies and how are they to be voted. Voting procedures and policies should be clearly defined as part of your plan’s investment policy.

Every plan holding a significant amount of investments should have a written investment policy. For more information on creating this, and other types of policies, please see the Trustee Handbook published by the International Foundation of Employee Benefit Plans.

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