Investment Policy Statement Review: Beyond the Obvious

The Employee Retirement Income Security Act of 1974 (ERISA) holds fiduciaries to a standard of prudence when making investment-related decisions for a qualified ERISA plan.

The Department of Labor (DOL) and the courts have largely determined that said standard of prudence can best be determined by a fiduciary’s process, or procedures, used in making such decisions.  And though a written investment policy statement (IPS) is not explicitly required by ERISA, it is considered a best practice to create, and update, one to assist in guiding fiduciaries in making plan-related investment decisions.  The DOL routinely requests a copy of a plan’s IPS during investigation.  And the courts have regularly looked to the terms of a plan’s IPS to determine if fiduciaries undertook a prudent process in making decisions on behalf of the plan.

The language of an IPS can be a delicate matter.  It must be neither too vague nor overly strict.  A vague IPS creates no evidence of process.  If a court of law cannot determine the actual steps being taken in determining fiduciary action, the IPS is virtually toothless.

EXAMPLE:  A client decided to remove the timing conventions for placing an investment on watchlist and potentially removing a fund from our sample IPS.  During investigation the DOL requested and reviewed the client’s IPS.  The investigator cited the plan for lack of discernible procedure in their IPS.  In the investigator’s mind the plan essentially did not have a prudent process because there was no guidance regarding when a fiduciary was to take an action in regards to an investment offered by the plan.

At the other end of the spectrum an overly strict IPS serves to limit the flexibility of the plan fiduciaries and may lead to unintended consequences.  A strict IPS typically contains a word such as “must.”  This word leaves little room for decision making on the part of fiduciaries.  And if the plan ever, even for a moment, doesn’t meet one of the “must” requirements it is out of compliance with the terms of the IPS, a potential fiduciary breach.  An overly strict, or overly detailed, IPS may inadvertently set unavoidable traps for fiduciaries.

EXAMPLE:  The Tussey v. ABB case provides multiple examples of an overly strict/detailed IPS.  The plan had adopted an IPS whose requirements were too easily violated.  As a result, though the fiduciaries may have been practicing prudent processes, those processes were not reflected in the terms of their IPS.  The court strictly construed the terms of the IPS and found that in multiple occasions the fiduciaries violated their duties by failing to follow the letter of their IPS.

As a result we have routinely reviewed and edited our sample IPS to be reflective of a robust prudent process for making investment-related decisions for ERISA plans.  The goal being that the IPS reflects a process that will lead to prudent investment choices for participants while simultaneously mitigating as much risk to fiduciaries as possible under the law.  Ultimately each client’s IPS is their own document and should reflect the client’s fiduciary philosophies and goals.  Thus the sample IPS may be edited to that purpose, or a client may use a fully custom IPS.

NFPR-2016-14 ACR#173059 02/16

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