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Case of the Week: Is My Client Required to Have an IPS?

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Illinois is representative of a common question related to a plan’s investment policy. The advisor asked:

"Is my client required to have an investment policy statement (IPS) for her 401(k) plan?"

Highlights of Discussion


  • Your client is not required by law to have a written investment policy statement (IPS) for her plan — per se. However, the Employee Retirement Income Security Act of 1974 (ERISA) is clear that plans must "provide a procedure for establishing and carrying out a funding policy in a method consistent with the objectives of the plan" [ERISA §402(b)(1)].

  • Further, the DOL’s Interpretive Bulletin (IB) 2008-02, as well as its predecessor IB 94-2, states that, “the maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA §404(a)(1)(A) and (B).” It continues, “For purposes of this document [IB 2008-02], the term ‘statement of investment policy’ means a written statement that provides the fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions, which may include proxy voting decisions.” IB 2008-02 also states, “statements of investment policy… would be part of the ‘documents and instruments governing the plan’ within the meaning of ERISA §404(a)(1)(D).”

  • In at least one court case, Liss v. Smith, 991 F. Supp. 278, 1998 U.S. Dist. LEXIS 238 (S.D.N.Y. 1998), the court found that based on the circumstances, it is necessary for a plan to maintain a written investment policy statement.

  • Therefore, as an employer who offers a retirement plan to her employees, your client has a fiduciary responsibility under ERISA to put in place a prudent procedure for selecting, monitoring and replacing the investment options the plan offers to participants. To that end, a formal, written IPS can serve as documentation for this required investment procedure, help your client and other plan fiduciaries prudently manage the plan’s assets, and mitigate fiduciary liability.

  • The IPS is typically one of the first documents requested in a DOL investigation for potential fiduciary misconduct. The lack of an IPS may indicate a lack of fiduciary oversight. Arguably, the only thing worse than not having an IPS is having one in place and not adhering to its guidelines and documenting such.

  • Because there is no formal requirement to have a tangible IPS, there is no prescribed format or template for creating the statement. Despite the lack of formal guidance, an effective IPS includes:
    1. Objective and purpose of the investment policy for the plan
    2. Roles and responsibilities of key plan players (e.g., fiduciaries, third-party administrators, investment advisors, investment committee, etc.)
    3. Factors the plan will take into account when selecting investments
    4. Frequency and methodology for rebalancing investment portfolios
    5. Procedures for controlling and accounting for investment expenses
    6. Procedures for monitoring the investment policy on a continual basis
    7. Description of how the plan will select service providers


Conclusion

Although ERISA does not contain a specific requirement that a plan have a written IPS, such a document can serve as a fiduciary-friendly framework for selecting, evaluating and replacing plan investment options.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2015 Columbia Management Investment Advisers, LLC. Used with permission.

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