AVAST! Retirement Committee Members, Think like a Pirate! By: Thomas ZamiaraAIFA® 2012.10.17

Like most, I remember certain lines or dialogue from favorite movies and TV shows.

I have friends who can recite, from memory, entire chunks from The Godfather, Pulp Fiction, Ghost Busters, and of course Family Guy.  [Note to self: find more cultured friends to balance my life]

One such set of movie lines which I recall and have shamelessly used with clients, was from the 2003 release of the Pirates of the Caribbean movie; The Curse of the Black Pearl.

Let me set this up for you;  The fetching Elizabeth Swann (Keira Knightly) who is pretending to be a relative of Bootstrap Turner, is trying to convince the petulant Captain Barbossa (Geoffery Rush) that she should be afforded those courtesies that one pirate might show another:

Elizabeth: Wait! You have to take me to shore.  According to the Code of the Order of the Brethren...

Barbossa: First, your return to shore was not part of our negotiations nor our agreement so I must do nothing.  And secondly, you must be a pirate for the pirate's code to apply and you're not.  And thirdly, the code is more what you'd call "guidelines" than actual rules.  Welcomeaboardthe Black Pearl, Miss Turner.

From Pirates of the Caribbean: The Curse of the Black Pearl (2003)

This line, "…the code is more what you’d call 'guidelines' than actual rules," is the one I just love.  Even Pirates create flexibility and allowances in their code of conduct.

We are engaged by organizations to assist them with developing governance structures where their investment fiduciaries, particularly those covered by ERISA[1], can apply and will allow them to operate, make decisions, and record their activities.

One of the tasks we are routinely asked to assist with is the development of investment policy statements (IPS).  We know that investment policy statements are 'technically' not required for defined contribution plans under ERISA, but the code is clear regarding the requisite features of a plan[2], in which every employee benefit plan shall— provide a procedure that… describe any procedure under that plan…and so on. 

The investment policy statement is a document that describes procedures and processes, particularly regarding the selection of the investment options offered within a plan.  Investment fiduciaries should fully discuss the attributes within this important policy statement necessary to convey their roles and responsibilities and their methodology for the determinations and decisions they make regarding the many aspects of their charge.  The central aspect of having such a written investment policy statement is that a committee can demonstrate process and that this process is applied consistently and fairly time after time. 

Let me suggest an outline of what a strong and defensible investment policy statement might look like:

  1. Plan Objectives and Purpose
  2. Purpose of the Investment Policy Statement
  3. Roles and Responsibilities
  4. Safe Harbor Provisions/Elections
  5. Guidelines for Selection of Investment Options
  6. Plan Monitoring Guidelines
  7. Communication and Education Policies
  8. Adoption

The Catch-22 behind the creation of a policy statement is that once it’s developed, down on paper, and adopted; now an investment committee has to live by it.  The construction of the investment policy statement and its implementation are crucial to insulating investment fiduciaries from injury resulting from the risk associated with challenges to their actions and decision making.  Investment policy statements are very “discoverable” in the event of an accusation of breach of fiduciary responsibility or challenge to the plan. 

The outline above provides a framework for IPS construction.  These what you’d call guidelines define the parameters that committees use when considering issues such as, what assets classes should we offer to participants; what qualities would we like to see in investment managers who manage money on behalf of participants; how do we measure and evaluate the cost/value proposition with regards to expenses within a plan; and descriptions of who does what with regards to operating and administering the plan. 

Let’s again recall what Barbossa said, the code is more what you’d call “guidelines” than actual rules.  Investment policy statements should not be rules-based in nature.  They should provide flexibility and discretion to investment fiduciaries in their decision making processes.  Let me be clear, putting a policy statement in place with no boundaries or guardrails raises equally challenging questions when asked to describe a committee’s processes and procedures.  The litmus test here is assessing whether your IPS clearly defines and describes the space needed to make decisions, provides remedies and other responsible actions on the part of investment fiduciaries.

Re-examine your existing investment policy statement; challenge your committee regarding its guidelines; and evaluate how well your actions agree with your policies.

Drink up me hearties …a pirates life for me!

[1] ERISA – Employee Retirement Income Security Act of 1974, as amended.

[2] ERISA Section 402(b)

Thomas F. Zamiara

Founding partner of Westminster Consulting, Tom serves corporate, non-profit and foundation clients.

An avid sports enthusiast and fan at his sons’ sports events, Tom is a longtime fan of the University of Notre Dame. Tom has been associated with St. Peter’s Soup Kitchen in Rochester, NY for decades...

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