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5 Things the Fiduciary Might Not Know About the 401k Plan Investment Policy Statement

September 26
22:20 2009

Does creating an Investment Policy Statement (IPS) reduce fiduciary liability or augment it? There’s no clear agreement on this matter. The United States Department of Labor (DOL) does not require the 401k plan fiduciary to create an IPS, and some lawyers believe putting something in writing only gives the DOL a longer rope to create the noose to hang the fiduciary. On the other hand, the DOL has long maintained it has greater concern for processes than outcomes, and benefits attorneys often view memorializing the process through an IPS and documenting its successful implementation as the surest way to reduce fiduciary liability.

From the November 2006 Report Of The Working Group On Prudent Investment Process (N.B.: This report was produced by the Advisory Council on Employee Welfare and Pension Benefit Plans, which was created by ERISA to provide advice to the Secretary of Labor and the contents of this report do not necessarily represent the position of the DOL):

If an investment policy statement has been properly formulated and memorialized, all prudent procedures covered will fall into place. This is predicated upon the fact that liability usually occurs when the fiduciary has failed to act in this area as opposed to acting improperly.

Once a 401k fiduciary decides creating an IPS can reduce fiduciary liability, there are five straightforward questions every IPS must answer:

Is the IPS Tied to the Corporate Vision and Mission? The IPS outlines the basic processes of the firm’s 401k plan. Fundamental to this is insuring the plan stays consistent with the corporate vision and mission. Some questions to answer: How does the 401k plan support the corporate vision and mission? Is there anything in the corporate vision and mission that is inconsistent with the 401k plan?

Does the IPS have Meaningful and Clear Objectives? This is critical to any clearly delineated set of processes and procedures. In the case of a 401k IPS, this specifically addresses 404(c) investment options and the due diligence process used in the selection and monitoring of those options.

Is the IPS properly Communicated? Creating an IPS is one thing, but it’s useless unless it is communicated to all relevant parties, including, but not necessarily limited to, plan trustees and fiduciaries, employees and vendors.

Is the IPS Measurable? While the objectives might be meaningful and clear, if there’s no way to measure them, then the IPS fails to achieve its purpose. Here’s a hint: Start at the end by identifying what’s measurable and work backward.

Does the IPS Allow for Independent Due Diligence? The most common mistake made by inexperienced fiduciaries is to merely accept an IPS offered by a third party investment provider. These generic statements often place the fiduciary in greater liability peril. It’s best to avoid a standard IPS (frequently referred to as a “statement of investment objective”) supplied by a vendor providing investment services.

If the DOL focuses on process, then the IPS can offer an easy way to comply. However, a poorly constructed IPS may actually increase fiduciary liability. The 401k plan fiduciary is better off working with an independent fiduciary consultant when crafting an IPS.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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