Investment Policy Statement: Friend or Enemy

Posted on January 6, 2014, by Fred Reish in fiduciary, Plan Sponsors, prudent. Comments Off on Investment Policy Statement: Friend or Enemy

The ABB case has been thoroughly analyzed and widely discussed. Most of that analysis and discussion, though, has been about expenses and revenue sharing. This email focuses on the duty to follow the terms of investment policy statements (IPS). More technically, section 404(a)(1)(D) of ERISA requires that fiduciaries follow the terms of the documents governing the operation of the plan, unless it would be imprudent to do so. The IPS is one of the documents governing the operation of the plan.

As background, the trial court found that the ABB plan committee violated several of its fiduciary duties. One of those was the duty to follow the terms of the IPS. In the IPS, the committee was obligated to follow certain procedures concerning the removal and replacement of a fund, including placing a fund on the watch list before removing it. The court found that the committee failed to follow the procedures in its IPS and, as a result, breached its fiduciary duties. That was unfortunate, since the committee could have amended the IPS to change the procedure. However, it failed to do so… perhaps because the committee had forgotten the terms of the IPS or perhaps because it believed its exercise of discretion would override the terms of the IPS.

So, is the IPS a friend or an enemy of plan committees? The answer is, depending on how it is done, it can be either.

Unfortunately, we see too many IPS’ that contain absolute and/or unnecessarily restrictive provisions. Those provisions can mandate a certain number of meetings, require a specified investment removal process, insist on a particular series of steps for some decisions, and so on. None of that is required by law… nor, in my opinion, by good judgment. Instead, an IPS should be a set of guidelines, and the plan committee members should be expected to exercise discretion and good judgment for the benefit of the participants.

Is there an alternative to the IPS being an “enemy?” Yes, of course.

If an IPS is properly drafted, it can serve as an educational tool for the committee and as a set of non-binding guidelines. In that way, the focus can be kept on the real job of the committee… to exercise its discretion. But the nonbinding guidelines in the IPS will be a helpful “map” for consistent and thoughtful decisions.

The moral to this story is that, if an IPS is going to be rigidly drafted as a series of requirements, then the committee should review the IPS before it acts and amend the IPS, if need be. On the other hand, and a better solution, the IPS could be better drafted. My experience is that, while the investment community is good at determining the criteria and other information to be included in an IPS, the investment community does not have the same risk management skills as attorneys. It is probably best if each does its “day job,” and the investment consultants focus on IPS’ as an investment tool, while the lawyers view them as risk management documents.

IMPORTANT NOTE: This case was heavily disputed and there may be disagreement about the facts. This article uses the facts as laid out in the court’s opinion and, based on my experience in other cases, the actual facts can be different.

Recent Insights

Interesting Angles on the DOL’s Fiduciary Rule #43

BICE Transition: More Than the Eye Can See

This is my 43rd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions....

Interesting Angles on the DOL’s Fiduciary Rule #42

Rollovers under the DOL’s Final Rule

This is my 42nd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles...

Inside the Beltway — April 25, 2017

Please join us for our 20th Inside the Beltway presentation on April 25, 2017. This is the next session in our ongoing series of...