Research by Plan Sponsor Council of America, Hewitt Associates and BARRA RogersCasey suggests that only about half of 401(k) plans have an investment policy statement (IPS). It probably should be 100%. There are good reasons to have an IPS — and to heed it.
Evidence of prudence
Although ERISA doesn’t require an IPS, federal courts have come close to doing so. For example, the U.S. Court of Appeals for the Fifth Circuit articulated a “procedural prudence” doctrine. This isn’t a test of the investment’s performance result, but rather one of conduct. It focuses on how the fiduciary acted in selecting the investment, not the investment’s success or failure.
Creating an IPS — and documenting that you’re following it — provides evidence that plan trustees are choosing and monitoring investments systematically. Generally in an audit, Department of Labor (DOL) auditors will ask to see your IPS. While there’s no sanction if you don’t have one, it may be a red flag for them to conduct a more detailed audit focusing on your fiduciary responsibilities. Thus, an IPS may give you some protection from DOL scrutiny.
An IPS also will give your investment team a clear understanding of the standards they’re to abide by. Review the IPS annually to make sure that plan assets are aligned with the IPS. Minutes of your meetings that reflect these reviews can demonstrate your continued monitoring of both.
An IPS should include definitions of roles and responsibilities of the parties involved, definitions of eligible and ineligible investments, investment selection criteria, investment monitoring procedures, default investments and criteria for replacing investments that aren’t performing against certain criteria. An Internet search will yield plenty of model statements you can review.
But don’t just take one of these examples and use it as your own. Consult your retirement plan investment advisor or benefits specialist to get started if you don’t already have an IPS in place.
For more information on this topic, contact Breanna.