Magazine article Government Finance Review

New Guidelines for Writing or Revising Your Pension Plan's Investment Policy: The Recent GFOA Recommended Practice on Investment Policies for Deferred Compensation Plans and the Associated Policy Checklist Offer Useful Guidance and Tools for Either Developing Policies from Scratch or Reevaluating Existing Policies

Magazine article Government Finance Review

New Guidelines for Writing or Revising Your Pension Plan's Investment Policy: The Recent GFOA Recommended Practice on Investment Policies for Deferred Compensation Plans and the Associated Policy Checklist Offer Useful Guidance and Tools for Either Developing Policies from Scratch or Reevaluating Existing Policies

Article excerpt

In 2003 GFOA adopted a recommended practice encouraging pension systems to develop and adopt formal investment policies. Soon thereafter, the Committee on Retirement and Benefit Administration realized that a similar recommended practice was needed for defined contribution retirement plans. This recommended practice, Investment Policies Governing Assets in a Deferred Compensation Plan, was adopted in 2004. (1)

In developing this new recommended practice, the committee recognized that creating a comprehensive investment policy could be a daunting challenge for many organizations. At the same time, the committee determined that a detailed investment policy checklist would be very useful--not only to those organizations that do not have a written investment policy, but also to those organizations that want to ensure that existing policies are in line with best practices. Accordingly, in January 2005 the committee developed and published the Investment Policy Checklist for Assets in a Deferred Compensation Plan. (2)

This article describes the recent GFOA recommended practice and checklist on deferred compensation investment policies, how the Ohio Public Employees Deferred Compensation Program has applied these guidelines, and how they can benefit other plan sponsors and administrators.

GFOA RECOMMENDED PRACTICE AND INVESTMENT POLICY CHECKLIST

According to the recommended practice, a written investment policy demonstrates the fiduciary's due diligence, conveys investment goals and priorities, and strengthens internal controls. As such, GFOA recommends that pension systems "establish and adhere to a formal investment policy governing assets in a deferred compensation plan, and that it be approved by the plan sponsor." Although each entity's investment policy must comply with state and/or local statutes and other common law and fiduciary standards, GFOA recommends that such a policy include the following elements:

* Statement of purpose

* Roles and responsibilities of key decision makers

* Standard of care (prudent person or prudent expert)

* Scope of investment options

* Reporting and monitoring

The checklist is a tool to guide the creation of a new policy or to re-examine an existing policy. It is comprehensive in scope and provides sample language to address specific issues. The checklist includes the following components:

* Introduction--This section includes the mission statement, a statement to act solely in the interest of participants and beneficiaries, a reference to applicable laws, and identification of the intended beneficiaries.

* Investment objectives--This section discusses the selection of investment options with materially different risk and return characteristics that allows participants to develop a diverse portfolio.

* Roles and responsibilities--This section addresses the different roles and responsibilities of the governing board, the internal staff, money managers, investment consultants, participants, and the record keeper.

* Scope of investment options--This section addresses the creation of a fund line-up that encourages participation, avoids undue complexity, and provides sufficient diversification. A sample tiered structure for a diverse fund line-up is also included.

* Reporting and monitoring--This section provides guidance for the development of an effective structure for reporting and monitoring investment results. It includes an outline for interim, annual, and special investment reports.

* Investment selection and termination--This section provides criteria to guide the selection and termination of investment managers.

INVESTMENT POLICY IMPLEMENTATION IN OHIO

The Ohio Public Employees Deferred Compensation Program is a public entity created by the State Legislature to offer and administer a deferred compensation plan for state and local government employees as a voluntary, supplemental retirement option. …

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