February 09, 2021

PLANSPONSOR Turns to Bruce Ashton for Recommendations on Properly Drafting Investment Policy Statements

In the article “Having an IPS Doesn’t Necessarily Increase Plan Sponsor Liability,” senior counsel Bruce Ashton spoke with PLANSPONSOR about the importance of having and following a properly drafted investment policy statement (IPS), which can offer guidelines and protection for plan sponsors.

According to the publication, retirement plan sponsors aren’t required by the Employee Retirement Income Security Act (ERISA) to have an IPS, but it is considered a prudent practice. However, Ashton had heard some plan sponsors say they don’t want an IPS because it will increase their liability.

“I don’t think that’s true,” Ashton said. “The issue is what’s in the IPS and whether plan fiduciaries are following it. For example, if the IPS has a policy in it that is not a prudent process and it gets followed, that could increase liability significantly. Likewise, if it prescribes an array of prudent processes and fiduciaries don’t follow them, it can increase liability.”

Ashton pointed to litigation in which a retirement plan’s committee was sued for not following the policy it had laid out. He also said if plan sponsors have a prudent policy that is properly drafted and plan fiduciaries follow it, they are in a better position to reduce liability. They can always be sued, but with a proper IPS, they have a much better defense.

“A properly drafted policy…should be one that lays out a guideline for the plan committee or fiduciaries of the structure plan investments should follow,” Ashton stated. “It should be clear that it is only guidance and not prescriptive and state in the policy clearly that the committee may deviate from the guidelines in the exercise of its discretion.”

For example, the IPS might say an investment that doesn’t meet certain criteria for two consecutive quarters must be put on a watch list, and if it doesn’t improve after two more quarters, it will be removed. However, Ashton said there might be good reasons not to remove the fund, so the IPS should state that plan fiduciaries are able to exercise discretion.

Ashton added that he had a client that had a fixed income investment in the plan that didn’t perform quite as well as its benchmark suggested it should, but one of the reasons was that it had more government securities in the fund than the benchmark typically did. “The investment was actually safer because it had more conservative underlying funds, so the committee decided in its discretion that it was a good thing to keep the investment rather than get rid of it because of its performance,” he said.

Ashton likes to see a discussion of the role of investment advisers hired by the plan sponsor in an IPS. “If it is clearly laid out in the IPS what the adviser is supposed to do on a periodic basis and they follow it, that can be helpful in protecting the committee from liability,” he said.

However, one thing Ashton doesn’t like is a lot of detail about which investment categories and strategies should be included in the plan. “It shouldn’t lay out specific investments to include. That has a tendency to lock people in,” he explained.

Finally, Ashton recommended reviewing the IPS periodically to see if modifications are needed.

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