Tuesday, August 2, 2011

Prudence in Light of a Credit Downgrade

Paraphrased somewhat, ERISA tells us that a plan fiduciary should handle plan assets in the way that a prudent man would. Historically, many have found that to mean some or all of these:

  • Don't take wild risks
  • Generally invest in higher-quality fixed income instruments
  • In tougher times, take the flight to quality as the returns that you may be giving up will more than be made up for by the comfort of knowing how safe those assets are
But, wait! The flight to quality, often seen as a movement to invest in US Treasuries, is producing negative returns that will likely get more negative as interest rates rise due to debt downgrade. But, you knew that was going to happen, didn't you?

So, did you pull your plan assets out of US Treasuries? If you didn't, was that prudent?

I don't know.

Think about it. Tell me what you think.

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