OCTOBER 2006 · PRACTICE NOTES · N O. 120
Deedra Walkey , U.S. General Counsel
I S S U E
Liability-Driven Investment (LDI) often requires investment in large amounts of long duration bonds or establishment of large notional positions in bond derivatives. ERISA requires sponsors to diversify their investments. Is the extensive bond exposure required for LDI consistent with the diversification requirements of ERISA? regulations that would limit a plan fiduciary's ability to take into account the risks associated with benefit liabilities or how those risks relate to the portfolio management in designing an investment strategy."
The letter contains a worthwhile summary of the ERISA fiduciary rules as well as a discussion of asset allocation and risk and duration. The complete text of the letter is reproduced in the Exhibit section of this Note.
R E S P O N S E
The US Department of Labor (DOL) has issued an advisory opinion 1 that asset allocation strategies which take liability characteristics explicitly into account are broadly consistent with ERISA.
The opinion provides that:
"Within the framework of ERISA's prudence, exclusive purpose and diversification requirements, the
Department believes that plan fiduciaries have broad discretion in defining investment strategies appropriate to their plans. In this regard, the Department does not believe that there is anything in the statute or the
1 The opinion letter was issued to a client of Reed
Smith LLP. We gratefully acknowledge Reed Smith and
Donald Myers’s kindness in furnishing it to us with permission of the client.
R E L AT E D R E A D I N G
Ezra, D. (2005). ”What Does ERISA Have to Say?
ERISA’s View on Matching Defined Benefit Assets and
Liabilties.” Russell Communiqué , Supplemental Issue, pp. 7-10.
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Reproduction of DOL Opinion Letter 2006-08A
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This material is solely for informational purposes. The opinions expressed herein represent the current, good faith views of the author at the time of publication. Any predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after the date indicated.
This Practice Note is based on information that we consider reliable, but cannot guarantee as accurate or complete. Nothing contained in this document is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax or investment advice relevant to your own situation or that of any entity which you represent or advise. This is not an offer, solicitation, or recommendation to purchase any security or the services of any organization.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Diversification does not assure a profit and does not protect against loss in declining markets.
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First used: June 2006 (reviewed April 2014 for continued use; disclosure revision: December 2014)
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