To help plan sponsors better understand how to ensure their investment policy statement (IPS) is clear and current, Head of Defined Contribution and Wealth Advisor Services Matt Sommer turned to Brad Campbell, former U.S. Assistant Secretary of Labor for Employee Benefits. Mr. Campbell outlines three areas where unclear or outdated IPS language can create problems for plan sponsors.
As the blueprint for a fiduciary’s investment selection and monitoring process, the investment policy statement (IPS) is a critical tool that retirement plan sponsors can use to defend their actions and decisions should they ever be called into question. But as the investing and regulatory landscape evolves, your IPS can quickly become outdated – in some cases to the point where it might do more harm than good. Of course, most plan sponsors understand that this is why it’s so important to regularly review and update their IPS. Knowing exactly where those updates might be needed, however, isn’t always so obvious.
To help plan sponsors gain a better understanding of specific areas to focus on, I turned to Brad Campbell, who is a nationally recognized figure in employer-sponsored retirement plans. As ERISA’s former “top cop” and primary regulator, Brad advises clients across a range of issues. Given his wide-ranging knowledge of the structure and operation of ERISA plans – and the fact that he has testified before various congressional committees on these matters more than a dozen times – I can’t think of anyone better equipped to offer guidance on this topic. I’m pleased to be able to share his responses to some of the questions I posed to him regarding IPS maintenance.
Q: Why is the IPS such an important document and how can it help plan sponsors defend their decisions as fiduciaries?
By definition, your job as an ERISA fiduciary is to make prudent decisions that are based solely on the interest of plan participants. It’s not your job to pick investment winners, or to beat a benchmark. In fact, you aren’t liable for whether your investment decisions turn out to be right or wrong. What matters is the process you followed to arrive at those decisions.
Furthermore, it is the inputs of that decision-making process – not the outcome – by which you are judged. And while ERISA may not require an IPS, they are widely used precisely because they establish a prudent fiduciary process. Should Department of Labor (DOL) investigators or plaintiffs’ lawyers come knocking, their first questions will likely be, “What does the IPS say, and did you follow it?” Thus, the IPS plays a crucial role in your defense, should you ever need it.
Q: What are some specific areas plan sponsors should consider when it comes to making sure their IPS is a current and accurate representation of their decision-making process?
One key area that can create problems is “low-cost” investments. The legal duty of the ERISA investment fiduciary is to pay only “reasonable” fees and expenses. However, it’s important to understand that “reasonable” is not a synonym for “cheapest.” The duty of the fiduciary is not to pay the cheapest lowest-cost fee; it is to pay a reasonable fee based on all relevant factors. In other words, fees are a factor in the fiduciary’s decision, but they are not the only factor. Further, a reasonable fee is a range the fiduciary aims for, not necessarily a specific figure.
Including well-intentioned but overly prescriptive language in an IPS can also create conflicts by tying the fiduciary’s hands. For example, a recordkeeping platform may offset administrative fees against certain investment fees, resulting in a higher-cost investment actually reducing overall plan costs. If your IPS states that the plan will offer only the lowest-cost investments, this option is effectively off the table.
Another area is underperforming investments. The fiduciary, not an arbitrary IPS deadline, should decide when performance issues warrant a change in managers or investments. And it’s the fiduciary’s responsibility to determine whether an investment remains prudent in light of both current circumstances and the investment’s role in the plan’s overall portfolio going forward. That said, it’s perfectly appropriate for the IPS to establish a watch list that outlines criteria for identifying and reviewing investments that have underperformed according to certain metrics. What the IPS should not do is attempt to determine the outcome of that review. Fiduciaries must retain the discretion to decide whether the investment remains prudent.
Q: What are some emerging trends that plan sponsors should be thinking about that may have become outdated in their IPS?
One of the first trends that comes to mind is ESG (environmental, social and governance) provisions. Plan sponsors should review their plan documents and IPS to determine what, if anything, they say about ESG-related investments. The DOL has issued guidance for ESG and ESG-like investments multiple times over the years. As a result, if your IPS adopted an ESG provision in the past, it may reflect one of the guidance documents that are no longer directly applicable.
Furthermore, while ESG investments can be prudently selected in the current regulatory environment, it is not advisable to limit investment review only to ESG-related investments. This so-called “negative screening” would exclude from fiduciary review most of the investments reasonably available to the plan, and likely is not consistent with a prudent fiduciary process.
Q: You mentioned the fact that overly prescriptive language can cause problems for fiduciaries. Can you expand on that?
Fiduciaries are obliged to follow the terms of their IPS to the letter. So if the IPS limits their fiduciary discretion by dictating “lowest cost” investments or by mandating divestment of assets under certain conditions, this can create conflicts for fiduciaries who believe the best interest of the plan lies in an action the IPS does not permit. These conflicts can be avoided by periodically reviewing and updating your IPS to allow for a level of discretion that can allow you to fulfill your fiduciary duty and better protect plan participants’ best interests.
The bottom line is that failure to follow the terms of your IPS can itself be deemed imprudent conduct. Besides being current and properly drafted, the IPS should also lay out a real-world process that you actually follow (not aspirational goals) and preserve the fiduciary’s discretion to make decisions. Furthermore, you should periodically review your IPS to make sure that what it says, and what you actually do, are the same.