ERISA investment requirements

[fidu]

It is my understanding that any and all ERISA governed plan assets must always be invested and can not sit idle.

If this is in fact the case, can someone point me to the appropriate section that this is governed by please.

Much obliged.

[Kirk Maldonado]

Look at DOL Advisory Opinion No. 93-24A and Associates in Adolescent Psychiatry, S.C. v. Home Life Ins. (7th Cir. 1991).

[fidu]

thanks.

i reviewed the dol advisory opinion but it seems only to deal with prohibited transactions, and does not set forth the requirement that all plan assets must always be invested.

any other guidance you may be able to provide would be helpful.

[mbozek]

Fidu: What do you mean by assests must be invested and not idle?? Some plans keep a proportion of their assets in money market or other low interest funds for liquidiaty or opportunity investment purposes. Or are you questoning whether a plan can keep assets in a non interest bearing checking account. I dont know whether there is a requirement under ERISA that all plan assts must be invested all the time. The fid is supposed to act under the terms of the investment policy for the plan in a prudent manner but plan assets are not required to be fully invested in equity or debt instruments all the time.

[Kirk Maldonado]

Fidu:

I think you are missing the forest for the trees. Reread it and think about the bigger picture. It doesn't say expressly what you are looking for, but it is implicit in the DOL response.

[austin3515]

I haven't seen anything specific (although I'm sure Kirk's reference is solid), but it seems to me it would be difficult for a fiduciary to prove he was acting prudently by investing in a noninterest bearing checking account. Even investing in a savings account seems derelict.

[fidu]

Kirk: I respectfully disagree. The DOL advisory opinion stands for the proposition that where a fiduciary (e.g. Trust Company) exercises discretion with regard to plan assets, its receipt of income from the "float" on benefit checks under a repurchase agreement with a national bank in connection with the investment of such plan assets would result in a transaction described in ERISA section 406(B)(1).2.

The dol adv op. does not address any requirement to keep assets earning interest at all times which was my question. I agree that one could argue that if the trust company keeps the interest it is a prohibited transaction under under ERISA, but my question relates to whether or not there is an EXPLICIT requirement under ERISA to keep earning interest on plan money.

Seems like I am left with the prudent man/investor argument which yields the same result but I was hoping for something more explicit.

[E as in ERISA]

Maybe you have to be thinking like a lawyer in order to see the connection here. If you bring a potential lawsuit to an attorney, one of the first things that you will be asked is "What are your damages?" If you don't have damages, you generally don't have a cause of action. (There are exceptions for specific types of cases, but that is not relevant here).

Under ERISA prohibited transaction rules, I think that you're frequently allowed to assume there are potential damages based on certain assumptions about how the plan assets woud have (or could have or should have) been invested. An employer can't defend a late contribution to a plan by saying, "Even if I had deposited the money, I would have left it in a non-interest bearing account so there is no loss to the plan." And when a trustee gets the float on distribution checks that haven't been cashed, it can't defend this by saying, "There is no loss to the plan because I would have put the money in a non-interest bearing account for liquidity purposes."

So from a legal perspective, the fact that you always have potential damages in these types of prohibited transaction cases, there is some implication that the plan must always be invested?

[Kirk Maldonado]

There isn't an explicit reference in that Advisory Opinion, but it is a fair interpretation of it.

I don't think that there is a need for an explicit rerference. How anybody could think that leaving plan assets uninvested is in the exclusive benefit of participants is beyond me. Anybody who thinks that shouldn't be a fiduciary.

P.S. I think that Katherine is thinking along the right lines.

[mbozek]

I think you need to focus on reg 2550.404a-1(B) - Investment duties of a fiduciary: Appropriate consideration with regard to a particular investment or course of action taken by a fid pursuant to his investment duties includes:( 2)(ii) © the projected return of the portfolio relative to the funding objectives of the plan. In some circumstances, e.g., an overfunded DB plan of a closely held corp, it may not be necessary to maximize investment return and the plan could put assets into low interest or non interest bearing accounts since there is no need to increase plan assets. While highly unusual it depends on the facts and circumstances of each case in order to make a prudent decision. There is no requirement that a fid make investment decisions that could result in an employer paying income/excise taxes upon termination of the plan in order to avoid a claim of not maximizing investment return of plan assets.

[E as in ERISA]

So are you agreeing or disagreeing with Kirk? I read that regulation to imply that plans should generally not be invested in low or non-interest bearing investments, and that there may be an exception to that general rule for overfunded DB plans.

[mbozek]

K: I dont see any such requirement any more than a requirement that plan assets be fully invested in equities and debt at all times. There may be times when low interest bearing accounts are a safer investment than stocks or bonds and safe investments like T bills may not be available in the appropriate quantity, price, or maturity.

[Kirk Maldonado]

I agree with MBozek.

Putting DB plan assets into aggressive investments doesn't make sense because the plan typically only assumes a modest rate of return in its actuarial assumptions.

Remember that the goal of ERISA is to minimize the risk of large losses, not to maximize the rate of return.

[david rigby]

Interesting discussion. However, Kirk I'm confused by your statement:

Putting DB plan assets into aggressive investments doesn't make sense because the plan typically only assumes a modest rate of return in its actuarial assumptions.

To this actuary, that seems backwards. The investment policy should come first, then the choice of an assumed rate of return.

[Kirk Maldonado]

PAX:

I agree with your comments if you assume that the plan's administration is run by the book.

In my experience, the people that invest the plan's assets in very aggressive investments tend to be people that don't play by the rules. They tend to invest the plan's assets in the same way as their own personal investments.

In fact, many of them don't even have a formalized investment policy (to ignore).

[E as in ERISA]

I should not have included "low...interest" in my last comment.