Investment Policies For Participant-Directed Individual Account Retirement Plans By: Daniel Sharpe, Michelle Heffernan

The authors literally grew up with ERISA and the evolution of today’s participant-directed 401(k) and 403(b) plans.  Michele Heffernan began her legal career on September 3, 1974, the day after ERISA was signed into law, and Daniel Sharpe started his career one year later.  The following questions and answers focus on the basic premise of an investment policy statement or IPS for participant-directed retirement plans.

Q:  Is a plan required to have an IPS?  And if not, why have one?
DS:  The law doesn’t require the plan to have an investment policy statement, but the manner with which the plan fiduciaries manage the administration of participant-directed investments constitutes an investment policy – whether it is written down or not.  
MH:  We recommend that an IPS be adopted to provide guidelines for a plan committee or other fiduciaries in the administration of participant-directed investment options.  It’s important that an IPS does not impose mandates on fiduciaries beyond what the law already imposes.  A policy that creates additional rules for plan fiduciaries is probably worse than no IPS at all.  

Q:  Should an IPS dictate how many fund choices a plan should have or which asset categories should be covered?  
MH:  An effective IPS should describe the roles and responsibilities of a plan committee, service providers and other persons involved with the administration of plan assets and their investment.  The policy should suggest the scope of investment options and possible methods for selecting and monitoring those options, but it should not dictate either the number of choices to be made available or specific asset categories.  
DS:  We recommend including a reference to the fiduciary rules under ERISA section 404(c).  That is the statutory rule providing some relief from fiduciary liability for the results of participant-directed investment choices as long as the plan has at least three investment choices meeting regulatory guidelines on diversification.  Clearly, the evolution of plans today has gone far beyond three investment choices.  Committees we work with often discuss how many options are enough or are too much as well as the scope of asset categories to be covered.  The IPS should not prescribe the answers to these questions, but it should provide a framework for making decisions.  

Q:  Given the general nature of an IPS, wouldn’t it be reasonable to adopt a standard policy provided by a plan’s investment consultant or advisor?  
DS:  It’s important that plan committee members or other fiduciaries “own” the policy they adopt.  We find it very helpful to have a committee review and discuss the entire statement of investment policy before it is adopted.  A well-crafted IPS creates a guideline for committee meetings, the process of monitoring investment choices, and decision-making in changing or modifying investment options.
MH:  The policy should accurately reflect the intent of the parties involved with the plan.  The IPS should describe a process embraced by the plan committee in carrying out its responsibilities.

Q:  Should an IPS establish a procedure with a “watch list” or other standards for removing or replacing investment options?  
MH:  To reiterate an earlier point, it is critical that the IPS does not create additional fiduciary obligations by mandating specific actions.  We recommend including a statement of factors that may be considered in the review and evaluation of current and proposed investment options.  By articulating the range of factors that may be considered, a committee discussion can be effective in guiding a prudent review of options and in avoiding decisions based solely on recent investment performance.  
DS:  A good IPS can help keep the focus on the prospects for future performance of investment options rather than an over-reliance on past performance.  The effect of any investment policy or watch list should never be to “sell low and buy high” but rather to create a guide for a committee to maximize its fiduciary process and procedure on behalf of plan participants.  

Q:  Is there a downside to having an IPS?
MH:  The downside to having an IPS is the risk that it will be ignored or not properly followed.
DS:  A committee that adopts and then ignores an IPS may be breaching its fiduciary duties by failing to follow the plan documents.  It is better to amend an IPS to conform to the fiduciary’s practices than to ignore the IPS.

Daniel R. Sharpe

Daniel is an employee benefits and executive compensation attorney who as an ERISA lawyer has considerable experience in all aspects of employee benefits law. Much of his recent work has been focused on fiduciary performance and risk management. He has advised management and administrative committees...

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Michelle Heffernan

Michele O. Heffernan became of counsel to Bond Schoeneck & King, PLLC, upon its combination with Jaeckle Fleischmann & Mugel, LLP on January 1, 2016. She focuses her practice on retirement plans, executive compensation, multiemployer plans, and employee benefits in acquisitions and divestitures. She...

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