Prudent Investor Rule

In 1992, The American Law Institute (ALI) published its Restatement of the Law, Trusts: Prudent Investor Rule. Based on the tenets of Modern Portfolio Theory (for which three financial economists were awarded a Nobel Prize), the Prudent Investor Rule provides some 300 pages of detailed description on how to adopt a “general standard of prudent investment.”

Most states followed ALI’s lead and passed legislation incorporating its recommen­dations into their standards for trust ­management.

Following are some key concepts described in ALI’s publication:

• Diversification is fundamental to risk management.
• Risk and expected return are directly ­related.
• Trustees have a duty to avoid ­unjustified expenses.
• Trustees must balance protection of principal with need for current income.
• "Uncompensated risk" is undesirable, but it is appropriate to select a degree of compensated, or "market" risk.
• Because managing risk requires "deliberate assessment and judgment," trustees have "a duty as well as the authority to delegate as prudent investors would."

While the Prudent Investor Rule was designed to guide trust managers, a retirement plan sponsor’s responsibilities can be comparable. 

As a plan sponsor, how do you minimize the liability to which you are exposed? First, when you work with Dopkins’ Retirement Plan Services, we can sign on as your co-fiduciary. Second, by offering your plan participants a passive investment approach based on the same tenets of Modern Portfolio Theory, you can help them adhere to what is widely considered to be a prudent investment approach.

For more information regarding Dopkins Wealth Management, LLC, please contact Brian G. Cannon

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