“Kitchen Sink” IPS may be More of a Headache Than It’s Worth. Should you have an Investment Policy Statement (IPS) for your retirement plan? Yes. Should you throw everything and the kitchen sink in there? 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 — what they are, and what they do and don’t do. He did 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 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: he 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, we have seen 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 – nothing a little Tums can’t handle. However, a “throw-it-all-in” IPS could result in 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 all of that, for lack of a better word, “junk” in your IPS, you have to monitor it all and make sure you’re implementing all of the policies you put into place inside of that document. If you don’t, essentially, fulfill all of the promises set forth in your IPS — whether they’re related to your plan investments or any one of the other 500 things you’ve thrown in there — you could end up in worse shape than if you didn’t have an IPS at all.
The IPS is supposed to be a roadmap that guides the plan’s fiduciaries on how to properly manage and monitor 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 — never a good thing 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, and if those processes and the way the committee followed them (or didn’t) are ever called into question by regulators or legal counsel, it could spell trouble for the plan’s fiduciaries. Keeping irrelevant processes and policies out of your IPS can help safeguard against such scenarios.
In case it wasn’t obvious, we advocate developing a separate IPS, fee policy statement, education policy statement (discussed in a previous article here), and loan policy document. Plan design language and the like should be part of your plan document.
What information should go into an IPS? That’s likely a discussion for another article, but in short, it should:
- contain a clear statement of the document’s purpose
- include a list of the funds in the plan’s investment line-up
- outline plan objectives for the IPS
- spell out who on the plan committee is responsible for which duties
- provide guidelines for the mix of asset classes represented in the investment menu and explain how those guidelines will be implemented
- document how the committee will monitor performance objectives, benchmarks, watch list criteria, and fees
- be signed by 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 and work closely with your retirement plan advisor (if your plan uses one) when developing and/or updating your IPS and other plan documents.