WHY DOES YOUR 401(K) PLAN NEED AN INVESTMENT POLICY STATEMENT?
September 2, 2020
DOES YOUR RETIREMENT PLAN HAVE AN INVESTMENT POLICY STATEMENT?
if not, it should
A plan investment policy statement (IPS) is a written statement intended to provide a plan’s investment fiduciaries with a framework for decision making regarding various types or categories of plan investments. Typically, an IPS outlines the roles of the parties involved with the plan investment process and details their investment responsibilities. Although an Employee Retirement Income Security Act (ERISA) retirement plan is not required to have an IPS, it is generally considered a best practice to have one.
Why is that?
- The Department of Labor (DOL) favors IPSs. It is standard practice for the DOL to request to see a plan's IPS during a plan audit.
- Investment policy statements have become the norm. Since the majority of plans maintain an IPS, not having one may subject the plan to greater scrutiny. Failure to have an IPS could be seen in court as de facto evidence of a fiduciary breach.
- Most 401(k) plan advisors will insist that their clients have an IPS. In fact, many plan advisors assist 401(k) plan sponsors with the development of IPS as one of their core service offerings. Plan advisors should offer this service to help the plan sponsor develop a strategic and coherent approach to plan investments.
- Establishing a well-constructed IPS by the 401(k) plan sponsor requires careful consideration of the plan’s investment objectives and how to achieve them.
- A 401(k) plan must consider plan demographic information, including age and income, plan design features (e.g., automatic enrollment, automatic escalation) and the investment sophistication of plan participants. An IPS requires the named fiduciary to consider the types of investments it considers wise.
- By setting forth criteria involved in the selection and monitoring of plan investments and time periods for assessing investment performance, an IPS, if adhered to, can promote consistent plan investment decision making in accordance with objective factors.
- Establishing the selection and monitoring criteria involved in plan investments, as well as the applicable time periods for assessing investment performance, establishes prudent fiduciary oversight. Bad investment outcomes are still generally protected under ERISA if they result from a prudent decision-making process.
- An IPS also creates instruction for documenting the ongoing monitoring of plan investments required by plan fiduciaries. Quarterly investment reporting is most often recommended.
- An IPS can help transition new investment committee members and employees working with plan investments. An IPS can help preserve a 401(k) plan's investment objectives, strategies, and processes.
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