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Investment Policy Statement Must Stop Short of Promises

Flexible Leave PolicyInvestment Policy Statement (IPS) language must stop short of promising too much.  An Investment Policy statement can do more harm than good if it moves from policy to guaranteeing results.  The policy can become more of a liability than a benefit if it steps over the line on trying to do too much.  Should you even have an Investment Policy Statement (IPS) for your retirement plan?  Yes.  Should you throw everything in and include the proverbial kitchen sink?  Absolutely not.

Ary Rosenbaum, Esq., a well-known ERISA attorney who writes prolifically on the logistics of managing retirement plans, penned this timely and thoughtful article on the basics of investment policy statements.  He addresses what the IPS is, and what they do and don’t do.  His article does a good job of laying out the fundamentals, so we won’t belabor those details here.

However, if you don’t know what an IPS is, to quote Ary:

“An IPS is what it says it is, it’s an investment policy statement.  It’s a document that sets forth the objectives, restrictions, funding requirements and general investment structure for the management of the plan’s assets, and provides the basis for evaluating the 401(k) plan’s investment results.  An IPS is all about communication.  It sets the 401(k) plan’s investment guidelines and procedures to those assisting in the investment process, such as the retirement plan advisors you hire.  Most importantly, the IPS provides a guide for making future investment decisions.  It sets how investment options are selected and how they get replaced.  Having and using the policy statement compels you to be more disciplined and systematic, which improve the odds of meeting the investment goals of the Plan and avoid getting sued.”

Note: Mr. Rosenbaum uses the word “investment” seven times in that paragraph.  With good reason: the focus of your IPS should be on the management and monitoring of your plan’s investments — nothing else.

That said, there are increasing numbers of plan sponsors using their IPS as a catch-all for all things relevant to documenting plan policies, until it starts to resemble one of those refrigerator stew dinners.  In addition to investment policies, an average IPS might include policies on loans, fees, participant education, and even plan design language.

And sure, it sounds good in theory.  What could it hurt to throw a little of this, a little of that into the mix — after all, why not document everything plan-related in one place?  However, doing so could create some serious issues later.  In the case of an everything stew, the unwitting consumer might end up with indigestion.  However, a “throw-it-all-in” IPS could result in increased fiduciary risks and liabilities to plan sponsors and retirement plan committees – quite a bit more serious, indeed.

The issue at hand is that once you’ve included too much to track,  you have to monitor it all.  Fiduciaries must implement all of the policies you put into place inside of that document.  If you don’t fulfill all of the promises outlined within your Investment Policy Statement you have likely added liability.  You could end up in worse shape than if you didn’t have the Investment Policy at all.

The Investment Policy statement needs to be crafted as a road map that guides the plan’s fiduciaries on properly managing and monitoring the plan’s investments.  Creating an IPS that’s larger in scope than that muddies the waters.  It has more potential to create confusion on the part of the plan’s decision-makers.  Doing so is never a good practice when it comes to fiduciary responsibilities.

It also leaves the committee open to the potential for accidental, but not harmless, fiduciary breaches.  For example, let’s say the IPS says the plan committee will review the investment lineup each year.  But it also says that the committee will educate participants about the plan’s investments — a process that, ideally, would be documented in a separate education policy statement (EPS).  Let’s say the committee follows the process outlined in the IPS and reviews the investments as documented but fails to carry out its duty to educate participants. Both duties are outlined are in the IPS, therefore, the committee is responsible for ensuring both get done.  If not, it could spell trouble for the plan’s fiduciaries.  Removing irrelevant processes and policies from your Investment Policy Statement can help safeguard against such scenarios.

What information should go into an Investment Policy Statement?  Each policy is unique however it is a good idea to include:

  • a clear statement of the document’s purpose
  • a list of the funds in the plan’s investment line-up
  • an outline of the plan’s objectives
  • a description of who is on the plan committee
  • a reference to whom is responsible for which duties
  • guidelines for the mix of asset classes represented in the investment menu
  • how the committee will monitor performance objectives, benchmarks, watch list criteria, and fees
  • signatures from everyone on the committee that they have reviewed and understood the IPS

You can review sample IPS documents here.  It’s a good idea to consult legal counsel with ERISA expertise.  Also consider working closely with your retirement plan advisor (if your plan uses one) when developing and/or updating your Investment Policy Statement.

Steff Chalk

Steff Chalk

Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.
Steff Chalk
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