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Fiduciary Foundations: The Investment Policy Statement

Presented by Will Berigan

In any walk of life, a successful outcome is often predicated on a solid plan. For fiduciaries who bear the responsibility for their companies’ 401(k) plan investment decisions, an investment policy statement (IPS) is the crucial foundation upon which an effective and compliant retirement plan rests. Below are some IPS tips that can help set every plan sponsor up for fiduciary success!

What Is an IPS, and Why Is It So Important?

Simply put, the IPS is the blueprint that lays out how all retirement plan investment decisions are made. It is the governing guide that helps fiduciaries stay focused throughout their decision-making process. Although technically not required, maintaining an IPS for your retirement plan is strongly recommended. Why? Because it fulfills one of your critical fiduciary responsibilities—to demonstrate prudence when making fiduciary decisions.

Further, when the U.S. Department of Labor conducts a retirement plan audit, it requests a long list of plan-related documentation, including “analysis regarding the dismissal or retention of portfolio investments.” In the event of such an audit, furnishing your IPS would help satisfy this part of the request.

What are the benefits of an IPS?

There are several benefits to creating and maintaining an IPS:

·         Documentation: An IPS establishes a written process for making investment-related decisions.

·         Confidence: By strictly following the IPS, fiduciaries can feel confident that they are carrying out their duties in a manner consistent with the expectations that have been laid out for them.

·         Continuity: Most businesses experience turnover. When employees who serve as fiduciaries leave their firms, the IPS can provide clarity and structure for the new employees to help ensure that there’s no lapse in fulfilling fiduciary duties.

·         Simplicity: Although an IPS is a complicated document, when adhered to, it offers simplicity and clarity for those tasked with implementing its instructions.

 What Should Be Included in the IPS?

A well-constructed IPS includes a few critical components:

·         Plan objectives: This section explains why the retirement plan exists and how it will serve employees. It also describes the plan’s investment goals.

·         Roles and responsibilities: This section describes for what the fiduciaries—including third-party fiduciaries such as service providers or plan advisors—are responsible.

·         Asset class guidelines: Here, the sponsor defines the process for determining which asset classes are appropriate for the plan and lists the asset classes that will be made available to participants.

·         Selection and evaluation of investments: This section outlines the process for selecting and periodically evaluating plan investment options. In general, performance objectives, applicable benchmarks, fees, investment manager philosophy, and organizational strength are considered.

·         Removing investment options: The criteria, rationale, and action steps for removing an investment option from the plan are laid out here.

·         Requirements for qualified default investment alternatives (QDIAs): QDIAs offer plan fiduciaries safe-harbor protection from certain risks associated with default investments. This section explains the characteristics that a plan investment must have in order to qualify as a QDIA. Target-date funds, a common investment choice within retirement plans, have become the typical QDIA choice for plan fiduciaries.

·         Fee review: This section would contain a process for determining and assessing that plan-related fees are reasonable in relation to the service that is being provided.

 IPS Best Practices

Your IPS is a living, breathing document. Review your IPS periodically—at least annually—to ensure that it does the following:

·         Continues to meet the objectives of your plan and unique needs of your employees

·         Stays current with changing investment climates

·         Incorporates new asset classes when necessary

Follow the terms of the IPS as written. Most experts agree: the only thing worse than not having an IPS is having an IPS but failing to follow its terms. This is a clear breach of fiduciary duty that has been at the heart of recent 401(k) litigation.

Get help when you need it. In fact, this isn’t just a best practice. It’s a requirement. If a plan sponsor doesn’t have the knowledge or expertise to create an IPS, ERISA requires the sponsor to enlist the help of a third-party expert, such as a retirement plan advisor or another service provider, to draft and maintain the IPS.

 

Will Berigan

Shamrock Wealth Management

991 Sibley Memorial Highway, Suite 201, Lilydale, MN 55118

651-317-4330

 

Securities and advisory services offered through Commonwealth Financial Network® , Member FINRA/SIPC,
a Registered Investment Adviser.