DOES YOUR IPS (INVESTMENT POLICY STATEMENT) HAVE GAPS? ASK THE LAWYER # 3 by Carol Buckmann
A 2017 Callan Survey reports that 90.9% of defined contribution plans have investment policy statements. Department of Labor auditors will ask to see these, although nothing in ERISA specifically requires that plans have them. Investment policy statements are plan documents and they aren’t all equal. The ones that come across my desk can vary greatly in coverage and details. So when plan fiduciaries tell me they already have an IPS, I always ask if the IPS was reviewed by a lawyer before it was adopted. All too frequently, I learn that it was not.
If your IPS has problems or gaps, they can create legal problems, but it is not too late to fix them. Your IPS should be reviewed regularly for needed changes.
Here are some red flags:
- An IPS that is designed to protect your advisor or vendor. The purpose of the IPS is to protect the sponsor’s internal plan fiduciaries. It is not intended to provide cover for the advisor by listing every detail of the advisor’s review process. An IPS should also never lock the plan into a particular vendor with statements such as: “Our investment policy is to pick a diversified menu from among the choices provided by ____.” An IPS should be a “big picture” document that defines the elements of a prudent process regardless of who is providing plan services.
- An IPS that doesn’t have a section on fee review. According to the Callan Survey, less than half of plans have written fee policies. If you don’t have a fee policy, it is really important that your IPS describe a process for determining that fees are reasonable in relation to the services provided. You would be well-advised to include sections on regularly benchmarking fees and doing rfp’s.
- An IPS that doesn’t discuss QDIA or target date fund review. As automatic enrollment becomes more and more popular, the assets in qualified default alternative investment funds (“QDIAs”) keep climbing, but many IPS documents don’t discuss QDIA processes. The most popular QDIAs, target date funds, have multiple fee layers and different glide paths and mixes of investments, and they are definitely not fungible. Your IPS should have a comprehensive QDIA section covering the elements of selecting and monitoring your default investment. This should include an analysis of the alternatives to target date funds, even if they are your QDIA, and standards for selecting and monitoring your QDIA. If target date funds are just one of your optional investment choices, a section on target date fund review and monitoring is still a good idea. And if you previously just adopted your vendor’s target date funds without investigation, the new provisions should be put into practice immediately. They may help you find better tdf’s.
- An IPS that locks you into decisions. Above all, your IPS should provide flexibility in decision-making. It should never lock fiduciaries into taking a particular action simply because an investment option fails or passes a mathematical test. Yet the same people who send you an IPS that details every fine point of their review process will often provide mathematical formulas to determine when funds are placed on watch or have to be replaced. Circumstances change. If there is a change in the law or in a fund’s manager that you expect to affect future performance, you need to be able to take those factors into account.
Carol Buckmann is the co-founding partner of Cohen & Buckmann. She is one of the top rated employee benefits and ERISA attorneys in the United States, and is widely known as an outstanding and innovative benefits lawyer, who deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation. She regularly shares her thoughts about new developments in the benefits industry on Cohen & Buckmann Benefits Blog.