Does your plan need an
investment policy statement?
It depends. If your goal is to provide quality
investment options to your participants consistently, then
the "best practice" is for a plan to have an investment
policy statement (IPS). However, ERISA does not require
that plans adhere to best practices, nor does it make any
reference to investment policy statements. While the
Department of Labor has acknowledged (in Interpretive
Bulletin 94-2) that there is no explicit ERISA requirement,
guidance from the DoL makes it clear that 401(k) investment
fiduciaries must make investment policy decisions for their
plans, whether reduced to a written documentan IPSor
not.
What are the "investment policy" decisions that must be
made by the fiduciariesdecisions about the asset classes
(or investment categories) to include in the plan, for
example, or the criteria for selecting the investments to
fill each of those categories? In addition, decisions also
must be made regarding the process and criteria for
monitoring the investments; whether to help participants
through investment education, advice, and lifestyle funds;
whether to offer brokerage or mutual fund windows; and so
on.
Is it safe to assume, then, that, if the committee makes
the investment policy decisions, but does not record those
decisions in writing, it has complied with ERISA?
No, it is not. At least one federal court has concluded
that, in the facts of that case, the failure of the plan
fiduciaries to have an IPS was a breach of ERISA's general
fiduciary rules. In that case, the fiduciaries had not
developed an investment policy statement and, in making ad
hoc decisions, engaged in an investment process that
resulted in substantial losses to the plan. In analyzing
the case, the judge determined that, if the fiduciaries had
developed an IPS, they would have gone through a process of
developing a sound and consistent policy that would have
avoided the investment losses. The judge found that the
failure to develop an investment policy statement was a
breach of ERISA's fiduciary provisions and that the breach
led to the losses to the plan, thus finding the fiduciaries
personally liable.
The court's holding could be dismissed as limited to the
unusual facts of the case. My reading of the case is that,
if the fiduciaries consistently engage in a prudent process
of selecting and monitoring the plan's investments, then
the lack of a written investment policy will not come back
to haunt them. However, if the fiduciaries do not manage
the plan's investments properly, then a court could easily
find that, if they had developed an IPS, the fiduciaries
would have thought through the issues and would have
consistently applied those deliberations to the selection
and monitoring of investments.
Stated simply, if you do a good job, you probably won't
breach your fiduciary duties if you don't have a written
investment policy. (Of course, in that case, you probably
wouldn't be in court to begin with.) On the other hand, if
you don't do a good job of managing your 401(k) plan
investments, a court easily could find that you have
breached ERISA's fiduciary duties by not having a written
investment policy. It is a catch-22, because the plan
committees that are doing a good job of investing are the
ones most likely to have an IPS, while those that are not
doing a good job are the least likely to have an IPS.
Aside from the legal requirements, the moral of this
story is that it is a good idea to have a map for any long
and difficult journey. An IPS is a map to prudent
investing. The ultimate test of the success of the
fiduciaries is whether the participants are accumulating
reasonable retirement benefitsbased on the successful
investing of employee deferrals and employer contributions.
Excessive losses or consistently inadequate gains are signs
of defects in the management of a planwhich can often be
traced to investment policy decisions.
Fred Reish
Fred Reish is managing director and partner of the
Los Angeles-based law firm of Reish Luftman Reicher &
Cohen. A nationally recognized expert in employee
benefits law, he has written four books and more than 100
articles on ERISA, IRS, and DoL audits and pension plan
disputes.
top