(b)est Practices: Investment Policy Statements

If you chose the first statement, you’re correct, and if you chose the second statement, you’re also correct.

Does your plan already have an IPS?  If you aren’t sure, please find out.  There’s a possibility that someone in your organization, at some point, adopted one.  It’s not uncommon for plan service providers to provide a canned IPS or a fill-in-the-blank template.  If your plan does have an IPS, you want to make sure it isn’t doing more harm than good.

Read through it and see if it makes sense in the context of how your plan is actually being managed.  Examples:

• If it says quarterly reviews will be held, are they? 
• If the IPS says minutes will be taken, are they?
• If it spells out specific triggers to replace funds, do you follow them?

As a rule of thumb, be very careful about the use of “shall”, “must”, and “will” statements.  In case the reason isn’t obvious, just picture a plaintiff’s attorney with a big smile on their face.  For example, let’s say your IPS says a fund will be removed if it underperforms its benchmark for three consecutive quarters.  If you haven’t followed your IPS, you could be financially responsible for any losses incurred subsequent to the point at which the IPS required that fund to be removed.  Ouch!  So, don’t paint yourself into a corner with “mandatory-type” statements.

If you’re starting from scratch, developing an IPS, include enough structure to be able to demonstrate you actually have a “prudent process” by which the plan’s investment menu will be managed.

It should be a useful document that will provide continuity in menu management even as the composition of your investment committee changes.  Although it will come at a cost, you may want to consider working with your ERISA attorney on this.  As a second option, you may be able to get a template from a plan sponsor organization, to customize it yourself, and to have it reviewed by your attorney.  A third option may be to get a template from your plan vendor, but you should review it carefully and edit as appropriate before adopting it.  Don’t assume just because it comes from a “big logo” vendor that it’s okay.  They are not a fiduciary for your plan, and are not obligated to represent your best interests.  They could, theoretically, insert language that would skew investment selection toward their own proprietary funds.

Your last option is to not have an IPS at all.  It isn’t required.  The benefit of not having one is it can’t be used against you.  The drawback is it will be harder to demonstrate that you have followed a prudent process (your fiduciary obligation) if you haven’t defined what that is.  You may also be missing an opportunity to do a better job on behalf of your plan participants.

Overall, we would consider it a best practice to have and to follow a carefully constructed IPS.  If you are working with a seasoned retirement plan adviser, they should be able to help with this.

Jim Phillips, President of Retirement Resources, has been in the investment industry for more than 35 years, the past 18 of which have been focused in the area of qualified retirement plans.  Jim worked for major national investment firms for 14 years before “going independent” in 1990.  Jim is an Accredited Investment Fiduciary, has contributed to two books on 401(k), and his articles have been published in Defined Contribution Insights, PLANSPONSOR’s (b)lines and ASPPA’s 403(b) Advisor, and Jim is a RetireMentor on MarketWatch.com. His work has been acknowledged with multiple Signature Awards from the PSCA, he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisers, by PLANADVISER Magazine, and he was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award. Jim has been a frequent speaker at national conferences, including SPARK, ASPPA, AAO and the PLANSPONSOR and PLANADVISER National Conferences.

Patrick McGinn, CFA, Vice President of Retirement Resources, is a CFA charterholder and has been in the securities industry since 1993. In addition to the Chartered Financial Analyst designation, he is an Accredited Investment Fiduciary and a member of the Boston Security Analyst Society. Together with Jim, Patrick has co-authored a number of articles which have been published in industry publications on topics about managing successful 401(k) and 403(b) plans. His work has been acknowledged with multiple Signature Awards from the PSCA, and he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisors, by PLANADVISER Magazine. He was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.