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I wrote, How does the TSP differ from getting your IRA or 401k from Vanguard?

To which you replied, As it pertains to this topic, it doesn't. In both cases, YOU pick what you invest in. Neither Vanguard nor TSP has any legal responsibility to ensure you are invested appropriately.

Pensions of course are different. When you make your own decisions you own the liability. When pensions make the investment decisions for you, they own the liability.

I'm not sure that's entirely true. 401(k)s are covered under the same pension section of the US tax code and there are some similar fiduciary responsibilities. The 401(k) is a trust where the employee is the beneficiary. They can act as an advisor to the trust, but the trust doesn't completely waive it's responsibilities just because the beneficiary can make some investment elections.

Sure, if the entire universe of investment options are available to you and you have agreed to waive liability, it's reasonable to conclude that you have assumed responsibility for your own decisions. Except that the Plan still has a legal responsibility to make sure that any investments are suitable for someone in your situation - which should be mitigated in part by ensuring you have the necessary information and tools to analyze your investment choices.

Also you wrote, Such is one of the reasons they must generally make sure all investment decisions comply with the Prudent Investor Rule.

The prudent investment rule requires a fiduciary to invest trust assets as if they were her or his own. This managing investor should consider the needs of the trust's beneficiaries – such as a family or employees that do not have a background in investing, the provision of regular income, and the preservation of trust assets – and should avoid investments that are excessively risky.

This rule would seem to apply to all manner of pension plans, including 401(k)s. The difference would seem to be that the defined benefit plan cannot address a single employee as their audience because defined benefit plans must treat the entire pension portfolio as a whole. Therefore what is prudent must be constrained to the subset of investments that would be prudent for all the beneficiaries of the plan. This would seem to place a serious constraint on defined-benefit plans, relative to defined contribution plans - which can allow the beneficiary to advise it as to what is prudent.

Finally, It would be a violation of fiduciary capacity to simply dump funds into a couple of Vanguard funds and otherwise "forget about them" ala Couch Potato.

"A prudent investment will not always turn out to be a highly profitable investment; in addition, no one can predict with certainty what will happen with any investment decision."

Actually when I read your link, didn't find anything in it that suggested you couldn't do exactly that - assuming the formulated Couch Potato portfolio meets the revised Prudent Man Rule standard of the UPIA, which for the most part I believe they do. Specifically the UPIA allows the fiduciary to delegate investment activities, so there is nothing requiring them to directly hold any particular asset or even to manage it themselves. In fact if a pension placed everything into say, institutional shares of a the Vanguard Balanced Fund or Wellington Fund, it looks to me like it would meet every single requirement of the UPIA.

BTW, the UPIA actually appears intended to RELAX standards in some cases. In particular this statement appears a bit suspect, "No category or type of investment is deemed inherently imprudent. Instead, suitability to the portfolio's needs is considered. As a result, investment junior lien loans, investments in limited partnerships, derivatives, futures and similar investment vehicles is now possible. However, speculation and outright risk taking is not sanctioned by the rule and remain subject to possible liability."

The main problem I see from reading your links would seem to come from this statement, "A declaration of trust outlines … Finally, this document can highlight details about the types of assets within a trust, depending on its objectives. For example, if the trust’s main goal is to provide a relatively liquid pool of assets for beneficiaries in a family for generations to come, the trust may hold safer securities, such as Treasury securities of medium duration." My guess is that a lot of pension trust documents have very explicit language as to the responsibilities of the board and the types of investments that should be held. That could certainly create problems with trying to apply a simple, hands-off investment strategy.

- Joel
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