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Guiding Your Plan with an Investment Policy Statement: The Prudent Thing to Do

Research by Plan Sponsor Council of America, Hewitt Associates and BARRA RogersCasey suggests that only about half of 401(k) plans have an investment policy statement (IPS) – it should be 100%. There are good reasons to implement and follow an IPS.

Although ERISA does not currently require an IPS, federal courts have come close to doing so. For example, the U.S. Court of Appeals for the Fifth Circuit articulated a “procedural prudence” doctrine. This is not a test of the investment’s performance result, but rather one of conduct. It is not only used as a guide for general investment goals and objectives, but also serves as a type of report card. It focuses on how the fiduciary acted in selecting the investment, not the investment’s success or failure.

Creating an IPS — and documenting that you are following it — provides evidence that plan trustees are choosing and monitoring investments systematically. Generally in an audit, Department of Labor (DOL) auditors will ask to see your IPS. While there is no sanction if you do not have one, it may be a red flag for them to conduct a more detailed audit focusing on your fiduciary responsibilities. Thus, an IPS may give you some protection from DOL scrutiny.

An IPS forces you to put your investment strategy in writing and commit to a disciplined investment plan. An IPS also will give your investment team a clear understanding of the standards they are to abide by. Review the IPS annually to make sure that plan assets are aligned with the IPS. You can demonstrate your continued monitoring by reflecting your review in the minutes of your meetings.

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An IPS should include definitions of roles and responsibilities of the parties involved, definitions of eligible and ineligible investments, investment selection criteria, investment monitoring procedures, default investments and criteria for replacing investments that are not performing against certain criteria. While a simple Internet search will yield plenty of model statements, you do not want to just take one of these examples as your own; an IPS should be tailored to each individual company.

Whether your company is implementing a new IPS or it is looking to revamp its current one, be sure to work with an expert who has experience creating and/or evaluating an IPS.  If you do not already have an IPS in place or are looking to update your current one, contact Doug Karasek at 312.670.7444.

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