An investment policy statement is a written document designed to provide a decision-making framework for retirement plan committee members as they manage their fiduciary obligations to plan participants. Outlined below are some considerations related to establishing an investment policy statement, as well as some factors to consider if you decide to develop one for your plan.
TABLE OF CONTENTS
Part 1: Fiduciary Rules
Part 2: Strategies to limit your liability
Part 3: Your Protection Plan
Guidance issued by the Department of Labor under the Employee Retirement Income Security Act of 1974 (ERISA) supports the establishment of a written statement of investment policy to help provide a framework for the exercise of fiduciary oversight. An investment policy statement can help provide a basis for consistent decision-making over time. It also may dilute the impact of sudden additions and departures of committee members, many of whom may have vastly different understandings of plan composition and construction.
There are pros and cons to developing and maintaining an investment policy statement. A well-written investment policy statement may be helpful to the plan sponsor and investment/retirement committee not only in discharging their fiduciary duties around selecting and monitoring the investment options of the plan, but also in demonstrating the existence of prudent fiduciary processes. However, while investment policy statements have received increased interest for retirement plans in light of greater regulatory scrutiny and increased fiduciary oversight, not all plans have one. Also, once adopted, failure to comply with investment policy statement provisions may be construed as a violation of ERISA.
The following outlines some of the pros and cons in creating an investment policy statement.
- Factors you should weigh prior to adopting
- Items to consider when developing
- Introduction to the investment policy statement
- Defining roles and responsibilities
- Investment option evaluation guidelines
Factors you should weigh prior to adopting an investment policy statement
- Provides a decision-making framework for fiduciary committees.
- If followed, may assist in demonstrating a prudent fiduciary process; this is often referred to as “procedural prudence.”
- Promotes consistency as members of the plan’s investment committee change.
- While ERISA does not require an investment policy statement, the Department of Labor has generally promoted it as being consistent with the fiduciary obligations set forth in ERISA.
- Failure to comply with investment policy statement provisions, either operational or substantive, may be construed as a violation of ERISA.
- Decisions inconsistent with provisions of the investment policy statement could be the basis for claims against the fiduciary.
- The mere creation of an investment policy statement will not relieve plan fiduciaries of liability; the investment policy statement must be followed, both operationally and substantively.
Items to consider when developing an investment policy statement
An investment policy statement should take into account the unique characteristics of the plan. Below are some general ideas to consider for developing and implementing an investment policy statement. You should consider any other topics or issues that may be appropriate for your plan. We hope this information will prove helpful to you if you decide to develop an investment policy statement. Fidelity encourages you to consult with your plan’s attorney regarding this decision and for guidance, should you choose to develop an investment policy statement.
Introduction to the investment policy statement
An investment policy statement can serve a variety of purposes and should, therefore, be tailored to meet the specific needs of the individual plan.
The following are some topics that you may want to consider including in the introductory part of an investment policy statement in order to better organize the document and to clarify the reader’s expectations.
- A brief description of the purpose and objective of the defined contribution plan
- The purpose of the investment policy statement
- Objectives of the investment policy:
- Provide structure for plan fiduciary decisions
- Clarify plan sponsor and/or investment committee responsibilities
- Articulate intention to comply with ERISA Section 404(c), including the rules regarding qualified default investment alternatives (QDIAs)
- Describe the structure of the investment option menu
- Provide investment guidelines for the investment options
- Describe investment option evaluation criteria
Defining roles and responsibilities
Some plan sponsors have found it useful to describe their own roles and responsibilities with regard to the investment of assets, as well as those of the investment committee (if one exists). In addition, an investment policy statement may also define the makeup of the investment committee and its decision-making process, so it is clear who is selecting and evaluating investment options and how those decisions are being made. This may also include a statement regarding the plan’s intention to comply with ERISA Section 404(c) guidelines.
Ideas for potential inclusion in this section:
- Investment committee roles and responsibilities
- Investment committee description
- Number of committee members
- Areas of the company/organization represented
- Statement of intention to comply with ERISA Section 404(c)
Investment option evaluation guidelines
A well-defined process for the evaluation of the investment options should be objective, should be implemented on a timely basis, and should use specific criteria that are consistent with the overall objectives of the plan.
Plan sponsors should be careful about how to describe procedures involving investments that do not meet certain defined threshold criteria. Such investment options should demand closer scrutiny and a heightened level of communication between the investment provider and plan sponsor.
However, if the investment policy statement states that such investment options will be discontinued as plan options because of the options’ inability to meet certain performance criteria, the plan sponsor and/or investment committee must be prepared to consistently honor this commitment. Failure to implement this or any provision of the investment policy statement could be construed as a fiduciary breach, as well as potentially place the plan sponsor and/or investment committee on a more precarious legal footing should any litigation be initiated by plan participants.
Ideas for potential inclusion in this section:
- Investment option evaluation criteria
- Performance vs. appropriate benchmarks
- Performance vs. appropriate peer groups
- Fee levels
- Investment option evaluation details
- Description of the performance or other behavior that is considered cause for potential action
- Description of how long such results can occur before action is taken
- Process to follow for options that do not satisfy established criteria, for example:
- Place funds on a “watch list”
- Contact the investment provider for details about current results and corrective actions
- Consider replacing the investment option, adding a similar option to the plan lineup, or eliminating the option altogether
An investment policy statement can be an important factor in administering a retirement plan for both the plan sponsor and the plan participants.
While adopting an investment policy statement may be helpful for a retirement plan investment committee to assist in meeting its fiduciary obligation, not adhering to the investment policy statement could result in claims of fiduciary breach, potentially negating any benefit derived from having the policy statement. Accordingly, keeping the investment policy statement updated and documenting the committee’s compliance with the established policy are as important as having a policy. Prior to adopting an investment policy statement, you should commit to meeting this challenge.
We hope this discussion of some of the considerations of an investment policy statement proves useful. Our purpose is to offer factors that some clients have found to be helpful in considering their investment policy statements, and to allow you to consider whether an investment policy statement could be appropriate for your plan. Before considering the adoption of an investment policy statement, Fidelity encourages you to consult your attorney.