The Ostrich Defense By: Diana PowellESQ.

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.”
—John Adams

Ideals, rights and responsibilities are codified and reduced to written documents to have legal significance. This is especially true when it comes to plan documents and company 401(k) plans. Ordinary citizens throughout the United States rely on documents such as the Bill of Rights and the United States Constitution every day for the rights and principles found within their texts. The importance of governance documents is easy to comprehend when viewed in this light. 

With regard to corporate governance and fiduciary responsibility, companies owe their employees a fiduciary duty to put their employee benefit plans, namely their 401(k) plans in writing. Under the regulations in ERISA 402(a) (1), employers are required to codify the employee benefit plan in writing, (specifically) contained in a written document referred to as a Summary Plan Description (SPD).

ERISA 402(a) (1) – Every employee benefit plan shall be established and maintained pursuant to a written instrument.

However, there is no definitive regulation within ERISA that requires the Investment Policy Statement (IPS) be put in writing. How can this be when Investment Policy Statements can serve such an integral part of the employee benefit plans? Best practice asks: Why hasn’t the DOL responded in a definitive way and regulated that the IPS should be made into a written document akin to the SPD? Many in the field suggest it is time they did.

According to DOL Bulletin 94-2, Investment Policy Statements “serve a legitimate purpose in many plans by helping to ensure that investments are made in a rational manner and are designed to further the purposes of the plan and its funding policy … to provide general instructions or guidelines to be applied in all applicable … types of investments.”

It is all but incontrovertible that an Investment Policy Statement is an integral part of a company’s employee benefit plan. Therefore, it is reasonable that employers be legally required to codify these IPSs as part of their documentation process, just as with SPDs. Short of making an official recording (as in spoken) stating what is contained within the IPS, a written account is more practical and more reasonable.

It is hard for those of us from the world of ERISA and of defined benefit and defined contribution plans and fiduciary responsibility to understand when Plan Fiduciaries fail to comprehend the importance of governance documents. It is even harder to fathom their failure to appreciate the consequences when they fail to follow the terms of their governance documents.

Furthermore, since Tussey v. ABB, Inc. (No. 2:06- CV-04305, 2010 U.S. Dist. LEXIS 45240 (W.D. Mo. Mar. 31, 2010)) ignorance is no longer bliss. If Plan Fiduciaries and participants did not think it was important to carefully and succinctly codify their governance documents before now, after Tussey v. ABB, Inc. they now know it is paramount. Keeping in line with Tussey they should then follow the principles they have set forth in their plan documents thereby fulfilling their duties as fiduciaries.

Tussey v. ABB, Inc. was a case that involved plaintiffs who were both present and former employees of ABB, Inc., a manufacturer of power and automatic equipment, who brought suit alleging “that their ERISA covered 401 (k) plans were paying their vendors excessive compensation.” ABB, Inc. had two committees responsible for managing the 401(k) plans, Fidelity Management Trust Company and Fidelity Management and Research Company. One of the plans was for collective bargained employees and one for non-collectively bargained employees. The Pension Review Committee was the named fiduciary of the plans and as such was responsible for selecting and monitoring the investment options.

One of the key issues involved in Tussey was the Pension Review Committee’s failure to follow the terms of the Investment Policy Statement. In its decision, the Court found as a matter of fact that “the Pension Review Committee, which was responsible for selecting plan investments, failed to follow its own procedures.” Ultimately, the United States District Court, W. D. Missouri, Central Division ruled in favor of the plaintiffs, finding that the ABB defendants breached their fiduciary duties.

Some pundits on this topic have suggested that, especially in the case of ABB, Inc. not having an Investment Policy Statement would have been better for the corporation than having the IPS and then failing to follow the terms of the Investment Policy Statement. While the facts of the case and the outcome certainly give merit to this argument—ABB, Inc. may not have been penalized as severely for failing in its fiduciary duties had it not unsuccessfully followed its own IPS document. The issue still remains with regard to ABB, Inc. and to any other corporation when it neglects to have an IPS or if it fails to follow the terms of its IPS is whether that corporation has failed in its fiduciary duties to its plan participants. One of the key issues is whether failing to have an Investment Policy Statement is a breach of a corporation’s fiduciary duty, remembering that the DOL does not yet legally require it. However, courts continue to look upon the use of IPS by plan committees favorably. It is an important issue to keep in mind.

Case Law shows that Courts support the creation of written Investment Policy Statements. In Liss v. Smith, 991 F. Supp. 278 (S.D.N.Y. 1998) the court held that “ERISA does not have a specific requirement that a written investment policy be maintained by the trustee.” In this instance the court found that “such a policy is necessary to ensure that the plan investments are performing adequately and meeting the … needs of the Funds.”

There are no clear explanations as to why the law hasn’t “caught up” with the best fiduciary practices suggested by the DOL and the Courts. However, best practices and Court rulings as well as comments from the DOL continue to indicate that there should be a requirement that Investment Policy Statements be put into a written document. An IPS which is reduced to a written document benefits the participants, both employers and employees. To meet the fiduciary responsibilities owed to clients, investment advisors should tell them, “Don’t wait until it’s too late.”

It is all but incontrovertible that an Investment Policy Statement is an integral part of a company’s employee benefit plan. Therefore, it is reasonable that employers be legally required to codify these IPSs as part of their documentation process, just as with SPDs.”

Diana K. Powell

Diana K. Powell, Esq. joined Westminster Consulting in September 2012 as Senior Legal Advisor. Previously she was a sole practitioner who advised educational organizations, government bodies and private corporations. Diana was responsible for negotiating agreements for high-tech software corporations...

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