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Contents

Foreword

Section One: Why Plan Sponsors and All Fiduciaries Need a Formal Process for Writing Their Investment Policy Statement

Chapter 1: Erisa and the Challenge of Fiduciary Responsibility

Writing an Investment Policy

What Is a Fiduciary?

Fiduciary Liability

Chapter 2: Your Fiduciary Responsibilities and Liabilities Under Erisa

Five Fiduciary Responsibilities

Fiduciary’s Personal Liability

A Fiduciary’s Primary Role Is to Manage the Process

Chapter 3: What Is an Investment Policy Statement and What Are the Benefits?

Risk Management

Monitor Investments

Summary

Chapter 4: Utilize the “Safe Harbor” Provisions Provided by Erisa

Prudent Experts

Five Recognized “Safe Harbor” Rules

Chapter 5: Complying with Erisa Section 404(c)

Section Two: How to Get Started and Steps to Formalize the Process

Chapter 6: Assembling the Documentation

Chapter 7: Steps to Formalize the Process

Step 1: Decide on Plan Goals, Objectives, and Strategies

Step 2: Decide on Strategy for Managing Risk

Step 3: Determine the Risk Tolerance of the Plan

Step 4: Set Forth Guidelines for Asset Classes

Step 5: Implement an Asset-Allocation Policy

Step 6: Mutual Funds Recommendations

Step 7: Delegate Investment Management Responsibility

Step 8: Investment Monitoring and Reporting

Section Three: The Template IPS

Chapter 8: Sample IPS Templates

Two Distinct IPS Samples

Organization of Templates

Chapter 9: Sample IPS Template #1

Step 1. Executive Summary and Background

Step 2. Purpose of the Investment Policy Statement

Step 3. Duties and Responsibilities

Step 4. Asset Class Guidelines

Step 5. Investment Manager Selection

Step 6. Monitoring the Investment Managers

Step 7. Controlling and Accounting for Investment Expenses

Step 8. Investment Policy Review and Monitoring

Chapter 10: Sample IPS Template #2

Executive Summary

Part I—Purpose

Part II—Investment Management Objectives

Part III—Roles and Responsibilities

Part IV—Investment Manager Selection

Part V—Investment Monitoring and Review

Part VI—Manager Termination

Part VII—Additional Provisions (optional)

Conclusion: Message to Plan Sponsors

Glossary

Appendix

Titles in the FP Books Trade Secrets Series

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The Life Insurance Handbook

By Louis S. Shuntich, JD, LLM

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How to Write an Investment Policy Statement

Thornburg Investment Management

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How to Build, Protect, and Maintain Your 401(k) Plan

Strategies & Tactics

By Dale Rogers & Craig Rogers

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Asset Allocation Essentials

Simple Steps to Winning Portfolios

By Michael C. Thomsett

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The Long-Term Care Planning Guide

Practical Steps for Making Difficult Decisions

By Don Korn

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Understanding ERISA

A Compact Guide to the Landmark Act

By Ken Ziesenheim

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Best Practices for Investment Committees

Thornburg Investment Management

Wiley Trading Series

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our Web site at www.WileyFinance.com.

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Foreword

The preparation and maintenance of the Investment Policy Statement (IPS) is the most critical function a fiduciary performs, for a well-written IPS becomes the narrative that defines how all of the investment-related responsibilities will be prudently managed.

—Don Trone

This statement is particularly relevant to defined-contribution plans—and yes, even participant-directed plans. Unfortunately, for three key reasons, a large number of retirement plans either do not have an IPS, lack a formal process for drafting one, or have prepared a document that is of little value. First, during the strong bull-market days, many companies saw little need to implement a consistent process, because few complaints were filed by customers. Plan sponsors also found the “prudent man” criteria—that defines for advisors the practices that constitute a prudent investment process—so vague and poorly defined that they could not easily develop guidelines that would assure them compliance. And finally, while ERISA (the Employee Retirement Income and Security Act) stipulates that a well-articulated, documented procedure for investment selection and ongoing investment evaluation is a fiduciary obligation, there has been little regulatory pressure for enforcement.

However, the current investment climate has changed dramatically, and there is even talk that having a formal Investment Policy Statement will become a legal requirement. In fact, ERISA implies that the financial advisor is advised and cautioned to discuss fiduciary-related matters with qualified legal counsel, and in the event of registered representatives, with their broker-dealer’s compliance department.

A financial advisor plays a pivotal role in assisting plan sponsors in the management of investment decisions, particularly the preparation and maintenance of a formal IPS.1 By helping plan sponsors with the management of their IPS, they are, in effect, providing the structure and evidence that a clear investment process and methodology are being followed, which fulfills their fiduciary obligation outlined in ERISA.

2