The document can address a range of investment concerns, Linda Boone, founder, president and chief compliance officer of Lubitz Financial Group, said in a recent webinar sponsored by fi360 and IPS AdvisorPro, an fi360 unit. The document is a useful component in an institutional retirement plan, where it can offer a solution to a number of issues in the current environment, Boone says, from greater regulation to fiduciary standards to the demand for more transparency. She points out that this written document—a guide to how to handle money—is not a contract but a directive from the client to the adviser, which documents the understandings and agreements.
The IPS should not be made watertight concerning the specificity of share classes in a plan under the Employee Retirement Income Security Act (ERISA), says Duane Thompson, senior policy analyst at fi360. Thompson feels that even with the recent ruling in Tibble v. Edison that the plan sponsor failed to investigate institutional shares for the same comparable investment, he is not convinced plan fiduciaries should force the issue in the IPS. “Just as an investment fiduciary is asking for trouble by getting too specific about the funds or securities it selects for the plan or retail client other than asset classes, I think it is also problematic if the IPS is overly specific about expenses – such as always seeking the lowest-cost shares,” he tells PLANSPONSOR.
There is no one true way to draft an IPS, according to Thompson. “Each court case is a facts-intensive analysis,” he says, adding that for a host of reasons other investments may be considered prudent. “As a cardinal rule of thumb, though, and as Boone mentioned in the webcast, a plan fiduciary should never put a promise to do something in the IPS that he or she is not sure they will be able to keep.”
It’s commendable for an investment committee to seek institutional share classes, Thompson says. “But if it puts language to that effect in the IPS and ends up not performing the necessary due diligence, or document its decisions, then it runs the risk of increased liability,” he cautions. “It’s helpful to note that the appeals court in Tibble stated retail class shares are not categorically imprudent, because there are many other relevant factors that a fiduciary must consider in selecting investment options.”
Thompson points out that an IPS drafted in a way that focuses solely on costs may, on its own, be imprudent. “The Tibble court also noted that nothing in ERISA requires a fiduciary to scour the market to find and offer the cheapest possible fund,” he says. “Conversely, if plan-governing documents or the IPS is silent on cost, that doesn’t mean it’s off the hook. A company may still run the risk of being held in breach for not investigating the availability of institutional class alternatives, IPS or no IPS, if the plan’s investment options are overly expensive when benchmarked to comparable plans.”Boone notes there is one part of people’s fear of lawsuits that can be addressed easily: the IPS must be qualified. “It is not in fact a good idea to put things in writing—if you cannot deliver them,” she agrees. “If you stipulate what the IPS should do, and you do it, it is a litigation protector.”
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