November 2000

Lack Could Mean Liability

A downturn in the market coupled with a litigious employee could spell trouble for companies whose investment strategies are unknown, unclear, or perceived as failing to produce hoped for returns, according to a presentation at the New York State Society of CPAs Chief Financial Officers Conference on October 12.

Michael T. Dwyer III, a partner at Bleakley, Dwyer, Schwartz, Cooney & Finney, said the majority of companies offering investment-based employee benefits [e.g., 401(k) plans, pension plans, and certain insurance vehicles] have no written investment policy statement and could be held legally responsible should their investment-based benefits fail to produce anticipated results. Dwyer recommends adopting an investment policy statement, because legal liability has often been absolved when a process for making investment decisions is “clearly established and systematically followed.”

An investment policy statement serves as the foundation and guidepost for future investment decisions. The statement should provide account information and a summary of investor circumstances. In addition, it should identify, discuss, and review investment objectives, time horizon, and attitudes about tolerance for risk or volatility. Such a statement compels the investor to be more disciplined and systematic in the decision-making process and clarifies expectations for all parties. It facilitates planning, helps avoid misunderstandings, establishes a record of decisions and an objective means to test them, and provides a ready means for communicating how the investor proposes to go about acting upon his or her duties. Dwyer distributed written guidelines for establishing an investment policy statement and “Understanding Fiduciary Investing: A Guide for Trustees and Plan Sponsors,” a pamphlet produced by the Institute for Certified Investment Management Consultants in Washington, D.C.

Kenneth A. Bailey, chair of the Chief Financial Officers Committee, said that CFOs are increasingly charged with improving the bottom line and protecting the assets of a company.

“An investment policy statement will help to protect the assets of the company’s retirement plans as well as help to prevent lawsuits,” Bailey said.

The investment policy statement should no longer be solely the concern of ERISA-mandated fiduciaries, Dwyer said, and because investments are now routinely a part of employee benefits, most companies need them. He said that if its CFO cannot answer one or more of the following questions, a company probably needs an investment policy statement: