Insurance Policy

By Fred Reish

It depends. If your goal is to provide quality investment options to your participants consistently, then the “best practice” is for a plan to have an investment policy statement (IPS). However, ERISA does not require that plans adhere to best practices, nor does it make any reference to investment policy statements. The Department of Labor has acknowledged (in Interpretive Bulletin 94-2) that there is no explicit ERISA requirement, guidance from the DOL makes it clear that 401(k) investment fiduciaries must make investment policy decisions for their plans, whether reduced to a written document –- an IPS –- or not.

What are the “investment policy” decisions that must be made by the fiduciaries -– decisions about the asset classes (or investment categories) to include in the plan, for example, or the criteria for selecting the investments to fill each of those categories? In addition, decisions also must be made regarding the process and criteria for monitoring the investments; whether to help participants through investment education, advice and lifestyle funds; whether to offer brokerage or mutual fund windows; and so on.

Is it safe to assume, then, that if the committee makes the investment policy decisions, but does not record those decisions to writing, it has complied with ERISA?

No, it is not. At least one federal court has concluded that, in the facts of that case, the failure of the plan fiduciaries to have an IPS was a breach of ERISA’s general fiduciary rules. In that case, the fiduciaries had not developed an investment policy statement and, in making ad hoc decisions, engaged in an investment process that resulted in substantial losses to the plan. In analyzing the case, the judge determined that, if the fiduciaries had developed an IPS, they would have gone through a process of developing a sound and consistent policy, which would have avoided the investment losses. The judge found that the failure to develop an investment policy statement was a breach of ERISA’s fiduciary provisions and that the breach led to the losses to the plan, thus finding the fiduciaries personally liable.

The court’s holding could be dismissed as limited to the unusual facts of the case. My reading of the case is that, if the fiduciaries consistently engage in a prudent process of selecting and monitoring the plan’s investments, then the lack of a written investment policy will not come back to haunt them. However, if the fiduciaries do not manage the plan’s investments properly, then a court could easily find that, if they had developed an IPS, the fiduciaries would have consistently applied those deliberations to the selection and monitoring of investments.

Stated simply, if you do a good job, you probably won’t breach your fiduciary duties if you don’t have a written investment policy. (Of course, in that case, you probably wouldn’t be in court to begin with.) On the other hand, if you don’t do a good job of managing your 401(k) plan investments, a court easily could find that you have breached ERISA’s fiduciary duties by not having a written investment policy. It is a catch 22, because the plan committees that are doing a good job of investing are the ones most likely to have an IPS; while those that are not doing a good job are the least likely to have an IPS.

Aside from the legal requirements, the moral of this story is that it is a good idea to have a map for any long and difficult journey. An IPS is a map to prudent investing. The ultimate test of the success of the fiduciaries is whether the participants are accumulating reasonable retirement benefits —- based on the successful investing of employee deferrals and employer contributions. Excessive losses or consistently inadequate gains are signs of defects in the management of a plan -— which can often be traced to investment policy decisions

© 2003 Article was reprinted, with permission, from Plan Sponsor magazine (November 2003), Copyright 2003 Asset International, Inc. All Rights Reserved.

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