Having an IPS Doesn’t Necessarily Increase Plan Sponsor Liability

A properly drafted investment policy statement can offer guidelines and protection for plan sponsors—if it is followed.

Retirement plan sponsors aren’t required by the Employee Retirement Income Security Act (ERISA) to have an investment policy statement (IPS), but it is considered a prudent practice.

However, Bruce Ashton, a partner in the Faegre Drinker Biddle & Reath LLP Employee Benefits and Executive Compensation Practice Group, says he’s heard some plan sponsors say they don’t want an IPS because it will increase their liability. “I don’t think that’s true,” he says. “The issue is what’s in the IPS and whether plan fiduciaries are following it. For example, if the IPS has a policy in it that is not a prudent process and it gets followed, that could increase liability significantly. Likewise, if it prescribes an array of prudent processes and fiduciaries don’t follow them, it can increase liability.”

Get more!  Sign up for PLANSPONSOR newsletters.

Ashton points to litigation in which a retirement plan’s committee was sued for not following the policy it had laid out. Although it wasn’t the principle issue in the lawsuit, in the long-running case of Tussey v. ABB, a court of appeals found that the members of the plan committee had violated their fiduciary duties by failing to follow the terms of the IPS. The court said, “Under longstanding interpretive guidance by the secretary, a statement of investment policy issued by a named fiduciary … is a plan document that fiduciaries are required to follow unless doing so would violate ERISA. Accordingly, the District Court correctly determined that the … fiduciaries violated their fiduciary duties when they failed to comply with the plan’s own requirements, as expressed in the investment policy statement.”

Natascha George, a partner in the ERISA and Executive Compensation Group at Goodwin, says an IPS is a plan sponsor’s declaration in written form of how plan fiduciaries intend to select, monitor and make decisions about investment options offered to plan participants.

Defined contribution (DC) plans have a wide array of investment choices, including a qualified default investment alternative (QDIA) and, possibly, brokerage windows, George notes. The goal of an IPS is to set forth the investment objectives of the plan. “Usually the goal is to provide a diversified menu of options so participants can construct a diversified portfolio based on their personal goals,” she says.

George says she tells clients it is far better to not have an IPS than to have one they are not compliant with. “Having an IPS is not required by ERISA or the DOL [Department of Labor], but the DOL has issued guidance saying that maintaining one is consistent with fiduciary duties,” she notes. “I tell clients to be sure they are comfortable with what’s in the IPS, because if they adopt one and don’t comply with it, that is a bad situation. It’s important as a fiduciary to have a clear understanding about what the IPS says and be willing to do whatever that requires.”

Ashton says if plan sponsors have a prudent policy that is properly drafted and plan fiduciaries follow it, they are in a better position to reduce liability. They can always get sued, but with a proper IPS, they have a much better defense.

“A properly drafted policy, in my view, should be one that lays out a guideline for the plan committee or fiduciaries of the structure plan investments should follow,” Ashton says. “It should be clear that it is only guidance and not prescriptive and state in the policy clearly that the committee may deviate from the guidelines in the exercise of its discretion.”

For example, the IPS might say an investment that doesn’t meet certain criteria for two consecutive quarters must be put on a watch list and if it doesn’t improve after two more quarters, it will be removed. However, Ashton says, there may be good reasons to not remove the fund, so the IPS should state that plan fiduciaries are able to exercise discretion.

Ashton adds that he had a client that had a fixed income investment in the plan that didn’t perform quite as well as its benchmark suggested it should, but one of reasons was that it had more government securities in the fund than the benchmark typically did. “The investment was actually safer because it had more conservative underlying funds, so the committee decided in its discretion that it was a good thing to keep the investment rather than get rid of it because of its performance,” he says.

Don’t Get Locked In

George says an IPS will usually set forth categories of assets the plan intends to offer, but it won’t specify particular funds. “It will probably say the plan will offer equity investments, including large cap, growth, small cap, international and emerging markets,” she says. “On the fixed income side, it will likely say the plan will offer cash or cash equivalents and bond funds.”

Plan sponsors might broadly say they want a fund that tracks the S&P 500, for example, but they shouldn’t specify particular funds, George adds. The IPS will say that within the different categories, the investment committee will evaluate specific funds that have the best risk/return profile, select those and review them periodically.

One thing Ashton says he likes seeing in an IPS is a discussion of the role of investment advisers hired by the plan sponsor. “If it is clearly laid out in the IPS what the adviser is supposed to do on a periodic basis and they follow it, that can be helpful in protecting the committee from liability,” he says.

He doesn’t like a lot of detail about which investment categories and strategies should be included in the plan. “it shouldn’t lay out specific investments to include. That has a tendency to lock people in,” Ashton says.

“The value of having an IPS is to set procedures for how funds are selected and monitored,” George says. “For example, if there is a manager change, is a fund put on the watch list for a while? In addition, if there is a style drift—a large cap equity fund looks like it’s venturing too far from its stated mix of investments—the IPS can provide a framework for guardrails for plan fiduciaries to use in determining whether the fund is no longer a fit.”

However, issues regarding watch lists can get plan fiduciaries in trouble, George warns. “If the IPS says the committee will get rid of a fund that is on the watch list for two quarters, that removes discretion from the committee,” she says. “The fund may just have a manager change and the committee wants to keep it on the list to make sure the new manager keeps in line with the stated mix of investments.”

Some policies in the IPS should not be hardwired, George says. She adds that removing funds can be disruptive; plan fiduciaries have to find a replacement fund and notify participants, “so there needs to be a really good reason for replacing funds.”

“The IPS should be specific enough to give fiduciaries guidelines but not so stringent that they are locked into courses of action that may not be appropriate considering all facts and circumstances,” George says.

“As a rule of thumb, be very careful about the use of ‘shall,’ ‘must’ and ‘will’ statements,” Jim Phillips, president of Retirement Resources, previously told PLANSPONSOR. “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.”

Adopting and Maintaining an IPS

There is no one-size-fits-all approach to an IPS, George says. “It’s risky for sponsors, particularly of smaller plans, to just go online and grab one from the internet,” she warns. “And they also shouldn’t just take one from a fiduciary investment adviser and rubber stamp it.”

George says, most of the time, she sees a plan sponsor adopt an IPS after assets have gotten large enough to hire investment advisers. “They create an investment committee, a committee charter and an IPS and hire investment advisers usually at same time,” she says. “Perhaps they will use an IPS provided by an investment adviser to begin with, but they should scrutinize it. Are they really going to meet quarterly or just periodically? Do they want to stick to a strict watch list?”

An IPS is especially good to have for first-time committee members who are dipping their toes into fiduciary responsibility, George says. “It’s good to have guidelines.”

Ashton says the IPS should be reviewed periodically to see if modifications are needed.

Actions to Address Retirement Savings Shortfalls for Military Spouses

Spouses of service members face unique challenges in the workforce, including unemployment and relocations, that can make it difficult to save in retirement plans.

Patrick Beagle relocated four times in the first five years of his enlistment in the U.S. Marine Corps. With every move, his wife lost her job, and, ultimately, lost out on savings for retirement.

Now a certified financial planner (CFP), consultant and owner and president of WealthCrest Financial Services LLC, Beagle reflects on the hardships that spouses of military members face, especially when they’re trying to save steadily on their own. “They’re not able to get consistent employment because every time a military member has to transfer duty stations, in those cases, they end up giving up a job,” he says. “So how does a spouse get any consistency?”

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

A recent Department of Defense (DOD) report found that a quarter of military spouses are unemployed—a rate roughly four times the national average of 6.3% in January. Military spouses often face other disadvantages—many are underemployed and earn less than they are qualified for, or earn nothing at all.

“Spousal unemployment in the military community is much, much higher than it is in the civilian world,” says Tara Falcone, a chartered financial analyst (CFA), CFP, Navy spouse and founder of financial empowerment company ReisUP. “When most retirement savings accounts such as IRAs [individual retirement accounts] or 401(k)s require you to have earned income in order to contribute to them, that in itself presents a barrier for military spouses to save and invest for retirement.”

Available Plans for Employed and Unemployed Spouses

Even if a military spouse finds a new job with every relocation, in many cases, their time with an employer does not meet the requirements to join a retirement savings plan, Beagle says. In cases like these, service members are encouraged to contribute to the federal Thrift Savings Plan (TSP), a government-backed tax-deferred retirement savings plan that automatically enrolls active-duty service members, but not their spouses.

Falcone says TSPs provide low fees for several available funds, in order to enable service members and their spouses to keep larger portions of their returns. If a spouse is not contributing to any retirement plan, Falcone suggests allocating a larger percentage of income to the TSP in order to meet appropriate savings levels for the future.

“Service members should be increasing the percentage of income they’re putting into the TSP, to ultimately make sure that they have enough to live off in retirement for both of them,” she continues. “That TSP is meant to cover you as a couple in retirement.”

However, Beagle notes that many entry-level service members have low wages and, therefore, rarely participate in TSPs or neglect to contribute to them so they can instead provide for their current needs. He encourages service members to enroll into a Roth TSP option, where they can contribute after-tax dollars during their lowest tax bracket years. “Even if the spouse is working, they’re going to be in the Roth window,” he explains. “They’ll probably be in the cheapest or in the lowest tax bracket they’ll ever be in in their life, in the military.”

Spouses who are working or earning income may contribute to an IRA or Roth IRA, Falcone adds. Or, if the spouse has not earned income themselves, active-duty service members can also contribute to a spousal IRA on their behalf. Military families may contribute directly to a TSP, an IRA up to the maximum amount allowed each year and a spousal IRA at the same time. “They can technically have three accounts—the TSP and then an IRA for both of the people in the marriage,” Falcone says.

Employer-Sponsored Benefits

Glenn Sulzer, a pension and employee benefits law analyst for Wolters Kluwer Legal and Regulatory U.S., says plan sponsors can suspend loan payments and offer hardship distributions to offset costs for military families. “A plan may provide for the suspension of an employee’s obligation to repay a plan loan during the period of the employee’s military service without risking disqualification or engaging in a prohibited transaction,” Sulzer explains. “However, a plan is not required to do so.”

Likewise, plan sponsors may offer hardship distributions for “an immediate and heavy financial need if it is made in order to pay for specified expenses,” Sulzer adds. Expenses incurred while a spouse is in the military, such as payments necessary to prevent eviction from a principal residence or to avoid foreclosure on a mortgage may entitle a spouse, as the primary beneficiary, to a hardship distribution.

It’s important to note these benefits only apply to qualified retirement plans for which a spouse would meet the criteria. Employers that do not provide such plans may consider automatic enrollment or other measures to ensure participation and, thus, access to the benefits provided, Sulzer says.

New Opportunities

As work environments become more flexible, Beagle imagines more employers will create “military spouse-friendly jobs” that allow employees to primarily work remotely, therefore making it easier for service member spouses to continue at one job. “It allows these workers to build that tenure to be qualified for the benefit programs that are available,” he says.

In the meantime, Beagle recommends employers change their rules regarding compensation practices. For example, because active-duty military spouses receive Tricare, a health care program of the U.S. DOD, employers can consider transferring the dollars they would spend on their employees’ health care costs to the retirement savings plan. “For most employers, the cost of health care benefits is huge,” Beagle says. “So, transfer those dollars if the spouse does not elect to have health care coverage.”

«