Adherence to the Uniform Prudent Investor Act

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 states 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 program.
  • 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 would.