ERISA plans buying bonds

[fidu]

Anyone aware of any prohibition under ERISA for a plan's trust fund to be invested in Corporate or Muni bonds.

is the plan prohibited from purchasing DEBT

1 in all cases

2. where the investment manager is not a designated QPAM

3. the plan can always purchase any type of debt instrument that it chooses.

much obliged

[jaemmons]

I don't know of any restrictions on these type of plan investments. However, you may have a problem with fiduciary responsibility/liability if the investments are contrary to the plan's investment policy. Ideally, I would say that investments in corporate/muni bonds are more or less used to "hedge" stock losses, and as long as the fiduciary has done the necessary research to add these investments to the plan's portfolio then they should be fine.

Nonetheless, given the volatility of the market these days, along with the corporate scandals now being disclosed to investors, it is always a good thing to review and possibly change the plan's investment policy to adapt to prospective short and long term changes in the market. That's not to say that all corporate bonds are good "hedge" investments (i.e.-Enron, WorldCom, etc.) so diligency needs to be exercised.

[mbozek]

ERISA does not prohibit/restrict any particular class/ type of investments by a plan. The only restrictions are on employer stock/RE by pension plans. Plan Fids are supposed to apply the modern portfolio concept of asset allocation among all asset classes ( stock, bonds, cash) to maximize return with the lowest risk. The plan fids are responsible for adopting an investment policy statement to allocate assets. I do question the prudence in investing in muni bonds which provide a lower return than corporate bonds since interest is tax exempt to individuals. Because a qual plan is a tax exempt entity under IRC 501(a) and any payment to participants are taxed as income under IRC 72 there is no sound reason for a qual plan to hold muni bonds that are tax exempt. However, a plan could taxable muni bonds that pay a premium interest rate.

[fidu]

makes good sense.

thanks once again.