IFA's Index Portfolios May Be A Prudent Option
The goal of index investing is to enable plan sponsors to implement retirement portfolios
with appropriate risk exposures to match risk capacity. As such, index investing
may be a sound way to uphold the fiduciary standard and help participants achieve
their retirement objectives. This concept is articulated in the Uniform Prudent
Investor Act ("UPIA"), adopted in 1992 by the American Law Institute's Third Restatement
of the Law of Trusts. IFA's index investing strategy may help plan sponsors fulfill
the requirements set forth in the UPIA.
The UPIA incorporates the tenets of "Modern Portfolio Theory" — the cornerstone
of the investment strategy implemented by IFA. Modern Portfolio Theory is an overall
investment strategy that seeks to construct an optimal portfolio by considering
the relationship between risk and return, especially as measured by alpha, beta,
and R-squared. This theory recommends that the risk of a particular stock should
not be looked at on a standalone basis, but rather in relation to how that particular
stock's price varies in relation to the variation in price of the market portfolio.
The theory goes on to state that given an investor's preferred level of risk, a
particular portfolio can be constructed that maximizes expected return for that
level of risk.
The UPIA acts as a road map for estate planning attorneys, trustees, and investment
advisors, as follows:
- 1. Sound diversification is fundamental to risk management and is therefore ordinarily
required of trustees.
- 2. Risk and return are so directly related that trustees have a duty to analyze
and make conscious decisions concerning the levels of risk appropriate to the purposes,
distribution requirements, and other circumstances of the trusts they administer.
- 3. Trustees have a duty to avoid fees, transaction costs and other expenses that
are not justified by the needs and realistic objectives of the trust's investment
- 4. The fiduciary duty of impartiality requires a balancing of the elements of return
between production of current income and the protection of purchasing power.
- 5. Trustees may have a duty as well as the authority to delegate as prudent investors
The table below shows the selection sheet for the IFA Index Portfolios. To view details of any portfolio, simply click on a colored, numbered button.
|Quick Guide to Index Portfolio Selection |
|Age Profile ||Risk Profile ||Index Portfolio |
(Click to View)
|Only High Risk Investors ||Most Aggressive || |
|Only High Risk Investors ||Aggressive || |
|Age 20 to 25 ||Aggressive || |
|Age 30 to 35 ||Moderately Aggressive || |
|Age 40 to 45 ||Moderately Aggressive || |
|Age 50 to 55 ||Moderate || |
|Age 60 to 65 ||Moderately Conservative || |
|Age 70 to 75 ||Moderately Conservative || |
|Only Low Risk Investors ||Conservative || |
|Only Low Risk Investors ||Risk Averse || |