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Managing Pension and Retirement PlansA Guide for Employers, Administrators, and Other Fiduciaries$

August Baker, Dennis E. Logue, and Jack S. Rader

Print publication date: 2004

Print ISBN-13: 9780195165906

Published to British Academy Scholarship Online: July 2005

DOI: 10.1093/019516590X.001.0001

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(p.289) Appendix A A Guide for the Prudent Fiduciary

(p.289) Appendix A A Guide for the Prudent Fiduciary

Managing Pension and Retirement Plans
Oxford University Press

Broadly speaking, the responsibilities of a pension plan fiduciary are to exercise care and loyalty. With these two responsibilities in mind, we present what we believe to be the minimum requirements fiduciaries must meet to fulfill their legal, and perhaps ethical, obligations in planning, staffing, and monitoring the plans that they serve.


  • 1. Participate in and oversee the development of the pension investment policy statement. This statement should include broad guidelines regarding strategic asset allocation, acceptable investment strategies, and permissible types of transactions, or alternatively, the types of transactions that are prohibited (e.g., writing uncovered call options). This statement should also indicate whether the chief investment officer (CIO) is allowed or expected to overlay decisions made by portfolio managers. For example, the statement should address whether or not the CIO is allowed to take positions in futures that increase or reduce the equities exposure of individual managers.

  • 2. Establish a risk tolerance for the pension plan that reflects the circumstances and preferences of both sponsors and beneficiaries. The pension plan fiduciary should actively participate in assessing risk, in setting limits on the total acceptable dollar loss (value at risk), and in developing policies that will keep the plan invested in a way that is consistent with the risk tolerance.

  • 3. Hire a CIO with the appropriate educational credentials and experience to serve as a competent administrator.

  • 4. Decide whether internal or external management of the pension plan will produce the highest risk-adjusted, cost-adjusted investment returns that are consistent with the risk tolerance set for the fund.

  • (p.290)
  • 5. Select investment managers based on clearly defined, rational criteria, such as historical performance (i.e., performance that yields insight into predictable future behavior), anticipated future investment, strategies, ability to handle administrative tasks, willingness to participate in the monitoring process, compensation, trading style and activity, and use of soft dollars.

  • 6. Establish investment guidelines for each manager. These guidelines should specify the minimum and maximum exposure to each relevant asset. For example, this might limit a manager to owning less than 5% of a company and investing no more than 10% of the managed portfolio in a company.

  • 7. Monitor the performance of investment managers for investment returns as well as for their level of adherence to the previously agreed upon investment guidelines.

  • 8. Ensure that all administrative and clerical functions are performed accurately and in a timely manner.

  • 9. In the case of fiduciaries of defined contribution plans, develop policies regarding investment alternatives and make these available to employees. Fiduciaries should select a preferred list of money managers, monitor the performance of these investment organizations, and educate employees so that they are able to make responsible investment decisions. Fiduciaries of defined contribution plans should also provide investment and performance measurements, and assist employees in interpreting these measurements. Fiduciaries should also facilitate portfolio rebalancing at reasonable intervals.

  • 10. Commit to continuing education to stay current with the latest advances in theory and practice.


  • 1. Develop methods for resolving conflicts of interest between the sponsoring organization and the pension plan, as well as between the plan and its vendors (e.g., external investment managers), in ways that are not disadvantageous to the pension plan from an ex ante perspective.

  • 2. Develop an approach to exercising shareholder rights. An example of this is proxy voting that works to the advantage of the pension plan from the shareholder's perspective rather than the manager's, regardless of the manager's connection to the sponsoring organization or the pension plan.

  • 3. Learn as much as possible about pension plan governance and investment management to maintain a high level of competence, and be as faithful as possible to the interests of pension plan beneficiaries.