Prohibited Transactions

[Guest Fidu2]

Is there any rule preventing an ERISA governed EB plan from holding a portfolio exclusively made up of options and futures positions??

[Belgarath]

No rule that I'm aware of which specifically names these items, but it would be such an obvious violation of the fiduciary prudence rules that you might just as well surrender to the DOL in advance!

[Guest Fidu2]

what would be imprudent?

if institutional investment managers with skill and experience choose to buysell futures wouldnt that be a valid investment to qualify as prudent?

thanks

[goldtpa]

First of all the plan document would have to stiplulate that these types of investments are allowed. Or the plan document would have to be written in such a way that the language is broad enough to allow for it.

In addition, there are broker dealers who have policies on what you can invest in and what you can't invest in. Many broker dealers will not let you invest in uncovered options in a retirement plan. It may violate the NASDs suitability rules and the "know your client rule"

I would imagine that futures would fall under the same category.

[Guest Fidu2]

agree. anything under erisa specifically though

thanks.

[mbozek]

There is no prohibition against investing in options or futures in a qualified plan under ERISA. However, there are many investment reasons why investing plan assets exclusively in options and futures will not be permissible including suitability requirements of the investor (the plan) which will be required by the broker, minimum capitalization requirements and the prohibition against against the plan guaranteeing borrowing by the account to cover losses. Also the limits on plan contributions could prevent the transfer of cash need to cover losses. An option strategy that could result in losses that cannot be coverd with cash or by the sale of liquid securities should be avoided. The CBOE has published materials on using options in a retirement plan or IRA. The only legitimate strategy for options in a retirement plan is the selling of covered calls because there is no risk of loss. I dont know why any plan would invest in futures since most professionals lose their investments.

[Guest Harry O]

I'm not sure I agree with the statement that "most" professionals lose their investments in futures. For every loser, there must be a winner. But I agree that futures are a "dont't try this at home" type of investment.

[Guest Fidu2]

agreed, and

thanks.

[GBurns]

Fidu2

Where did you ever manage to find or where do you think that you can find these "institutional investment managers with skill and experience choose to buysell futures" ?

Have you checked the actual track record of anyone claiming such "expertise" or were you just being hypothetical?

[Guest Fidu2]

it was just a hypo.

but you could get any of the big name money managers to set up such a portfolio no doubt.

[Demosthenes]

Have to play Devil's Advocate here. There are a number of hedge funds that made buckets of money last year.

John W. Henry and Co's Strategic Allocation Plan and the Financial & Metals Program were up 30.7% and 45.1% respectively in 2002. These funds invested primarily in currency, interest rate, and metals futures. (Source Boston Globe Business section 4/15/03)

Argue that futures and options are imprudent, difficult to manage/track, yes. Argue that they are invariably losers and your client will beat you over the head with numbers like these.

I'd definitely agree that this is not a do it yourself kind of investment and would also argue that the near term mind set required for future/options is at odds with the long term view needed for retirement plans.

Just for the record, I have no financial interest in these funds and I have no association with John W. Henry and Co.