The Need for an Investment Policy Statement
Pension law (ERISA) does not specifically require a plan sponsor to have a written investment policy statement (IPS). But more than three quarters of 401(k) plans do. That is up from about 55% in 1999.* What is behind this increase? One possibility is that more plans are opting for ERISA Section 404(c) fiduciary liability protection.
Section 404(c) offers employers and other plan fiduciaries a means of shielding themselves from liability for losses that may result when employees exercise control over the investment of their plan accounts. An IPS that addresses the selection of plan investment managers and details how their actions will be supervised can help document that an employer is meeting its fiduciary responsibilities and 404(c) compliance requirements.
General Guidance
An IPS provides general instructions regarding various types of investment management decisions. It also provides a way for an employer to make broad decisions concerning investments, set investment goals, and communicate the policy to employees. Without a prudent investment policy, the plan sponsor could be legally liable for poor investment results. A written investment policy statement is documentary evidence that a prudent policy exists.
What To Include
While investment policies differ from plan to plan, most include the following.
A Mission Statement
outlining in broad terms the investment policy goals, general guidelines for the plan trustee, investment committee, and plan administrator, and the reasons for having these goals and guidelines. Some investment policy statements include specific criteria for selecting investment managers.
Policy Specifics
detailing the types of investments available under the plan, the investment objective of each, the acceptable levels of risk the manager may take, and any appropriate asset allocation guidelines. If an employer is seeking liability protection under Section 404(c), generally, the plan must offer at least three diversified investment options with materially different risk and return characteristics. An IPS can include guidelines for ensuring employees have adequate investment choice for the plan to meet 404(c) requirements and for employees to build sufficient retirement assets.
Policy Monitoring Procedures
to be used to monitor the plans investment performance. The IPS should include a specific schedule for reviewing the plans investment selections, its overall policy, and investment manager performance. Reviews should be conducted at least annually and the findings should be documented. The IPS also should include procedures for replacing plan investments and investment managers.
Self-directed Plans
Plans that allow participants to direct their own investments should consider specifying:
How employees can exercise control over the assets in their plan accounts. A 404(c) plan generally must allow employees to give investment instructions at least quarterly and provide participants with specific investment information.
Benchmarks for measuring investment performance and the procedures for monitoring and evaluating performance.
* 43rd and 49th Annual Survey of Profit Sharing and 401(k) Plans, Profit Sharing/401(k) Council of America (PSCA). A model investment policy statement is available from PSCA online at www.psca.org.
To view a sample Investment Policy Statement, click here
To help your client develop an investment policy statement, use this worksheet
