Does the trustee for a tax qualified retirement program have to take factors into consideration not present for the general investor? We think so. We think there are two major considerations which the trustee must take into account and which the average investor does not concern himself with.
The first general consideration arises out of the fact that the trustee is dealing with tax sheltered funds. In effect, he is playing a 'heads you win & tails I lose' game with the Internal Revenue Service. If his investment efforts are highly successful, the participants in the Plan will receive substantial retirement benefits and the government will get more taxes than otherwise would have been the case.
On the other hand, if his investment efforts are unsuccessful, the losses cannot be deducted, but instead must be made up so that the original retirement goals can be achieved in spite of the losses.
We sum up the situation by saying that the government shares in the profits by taxing the retirees while the trustee and the employer must absorb the losses in full without being able to take any income tax credits for realized losses as is the case with the ordinary taxpayer.
Entirely aside from his fiduciary responsibilities, therefore, the pension trustee has a very strong reason for assuming a careful investment philosophy. His down-side risk is considerably greater than his up-side tax liability, because of the tax sheltered nature of the funds with which he is dealing.
The second major consideration present for the pension trustee, which is not present for the general investor is that the liabilities of a qualified retirement account mature at known dates in the future, namely, the participant's retirement age (anywhere from 60 to 70 years of age).
The trustee, in selecting his investments, must have in mind his need to meet at part the maturing liabilities for the retirement accounts of his employees as they reach normal retirement age.
General economic conditions are unsettled today, have been unsettled for the last 10 to 12 years, and bid fair to remain unsettled for some years into the future. The present unsettled conditions in the investment market, therefore, again emphasize that the investor trustee must be careful in his approach to an investment philosophy:
- Careful because the risks are all on your side;
- Careful because you must have liquidity at retirement age;
- Careful because the investment markets are unsettled to a very high degree.
Careful does not necessarily mean conservative and cautious. It does mean a careful evaluation and analysis of all the factors involved before an investment decision is made.
A retirement plan calls for a long-range well-allocated and diversified investment program which will achieve its goals. Given the ups and downs of the business cycle, the changing climate of the investment market and the hazards of day-to-day living in a high tension society:
A balanced investment program calls for a well managed and ever-changing mixture of:
- Equities and real estate for growth
- Fixed income and insurance for guarantees and risk control
A detailed discussion of how we feel these various factors should be handled for your own situation will be discussed separately.