Repair your wealth: advice for 401(k) investors and investment committees.

AuthorHenderson, Lon E.
PositionMoney Talk

Many investors and 401(k) plan participants are still reeling from the unprecedented volatility experienced in 2008 and 2009. When the S&P was off -37 percent for 2008, followed by an additional -18 percent during the first two months in 2009, many investors were not only shell-shocked, but realized that they were witnessing over half of their retirement assets erode in less than six months. Such carnage in the financial markets caused some investors to literally refuse to open their brokerage and 401(k) statements. Such reactions were common until the domestic and foreign equity markets started to recover, posting a positive 26 percent return at the end of 2009 and leaving most investors with the feeling of just stepping off an emotional roller coaster.

Although investors are tempted to ignore negative news and attempt to disregard the affect of volatile markets on their investments, such behavior is not appropriate for fiduciaries and investment committee members who are entrusted with one of the hundreds of thousands of 401(k) plans that are being managed throughout the nation. Such plans must be managed by the fiduciaries for the sole benefit of the plan participant.

One of the reasons that investment committee members and the fiduciaries of 401 (k) plans must take an active role in managing the plan is due to their mandated responsibility to meet specific fiduciary obligations as relegated under the demands of ERISA (Employee Retirement Income Security Act).

In compliance with ERISA, the fundamental duties of the fiduciary are clearly stated, The act is written and structured so fiduciaries will ensure that their efforts are in the sole interests of the plan participants and for the exclusive purpose of providing the participants with prudently managed retirement benefits. The standard of the plan fiduciary is very high and, as one court stated in Donovan v. Bierwirth, "the fiduciary obligations of the trustees [and other ERISA fiduciaries] to the participants and beneficiaries of the plan are ... the highest known to the law."

The Prudent Man Rule

Having the confidence that the fiduciaries are operating in your best interest, besides exercising the skill and discretion necessary, is a standard known in the industry as the "prudent man rule." The ERISA law clearly states that each fiduciary must use "the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar...

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