Compliance Consult | PLANADVISER November/December 2014

Another Look at the IPS

How to design a smart, safe investment policy statement

By Roberta Ufford | November/December 2014
Art by Dadu Shin

This column looks at how plan advisers may use an investment policy statement (IPS) as a mechanism to supply good client service for retirement and other plans governed by the Employee Retirement Income Security Act (ERISA), as well as to protect themselves against potential fiduciary liability in connection with plan advisory services.

Investment Policy Statements—In General

Department of Labor (DOL) guidance describes an IPS as a written document that provides the plan fiduciaries responsible for investment selections with guidelines for making various decisions relating to investment management. The DOL explains that maintaining an IPS is “consistent” with the fiduciary duty of prudence under ERISA and is in the interest of plan participants and beneficiaries. This is because, generally, fiduciaries satisfy the duty to act prudently by engaging in a “procedurally prudent” decisionmaking process.

Fiduciaries who adopt and follow a well-designed IPS that includes a framework of relevant information, as well as a process for reviewing this information when making investment decisions, can defend their choices as meeting this “procedurally prudent” standard. In addition, plans—even participant-directed 401(k)s and similar offerings—should maintain an IPS because, as a practical matter, the DOL asks to see a plan’s IPS in examinations and investigations, and may consider whether fiduciaries are making decisions consistent with the IPS.

Plan Adviser Duty to Comply With the IPS

ERISA requires fiduciaries to comply with all “governing plan documents.” The DOL and courts typically treat an IPS, once adopted, as such a document. 

A plan adviser making investment recommendations consistent with a client plan’s stated process, as outlined in a well-designed IPS, will have strong defenses against claims that his suggestions are not prudent or not in the plan’s interest. On the other hand, there could be evidence of imprudence—and potential liability should investment losses occur—if an adviser’s recommendations are inconsistent with the plan’s IPS.

IPS Tips for Advisers

Given the importance of a plan’s IPS following a prudent fiduciary process, fiduciary advisers can help themselves, and their plan clients, by assisting in establishing and maintaining an effective IPS. Here are some ideas:

• The IPS adopted by each of your plan clients should be consistent with the process you use for making investment recommendations. This is an opportunity to discuss your investment process with the client and confirm the client’s approval. Firms that use a standardized procedure may provide a template IPS document. If your firm does not offer such a template, work with the client to modify the plan’s existing IPS.

• The client plan sponsor or another “named fiduciary” designated in plan documents as responsible for plan investments—usually not the plan adviser—must approve and maintain the plan’s IPS.

• A typical IPS outlines roles and responsibilities of different parties, including the plan adviser. Reviewing this section of the IPS with your plan client allows you to clarify your role as adviser, the scope of your responsibility, and the responsibilities and decisionmaking authority of the client—possibly also preventing later misunderstandings. Your client advisory agreement should be consistent with this section of the IPS.

• An IPS should be flexible and guide—not mandate—decisions. For example, a well-designed IPS typically does not require immediate removal of an investment or investment manager based on a particular event or a failure to meet a standard. Instead, fiduciaries should be allowed to consider transition costs, market changes and other relevant information before acting. For participant-directed plans, an IPS may allow consideration of administrative disruption and cost in deciding whether to change a plan’s investment lineup.

• An IPS should include provisions for periodic review—once a year is typical. Consider building into the document time to review the IPS with the plan sponsor in an annual client meeting.

• Maintain a copy of each client’s IPS. Your client advisory agreement should require notice to you of updates to the IPS that affect your advisory services and allow you to object to changes.



Roberta Ufford, a principal of Groom Law Group, has spent more than 20 years advising plans, sponsors and plan service providers, including advisers, on fiduciary responsibility issues under ERISA and related laws applying to ERISA-covered and governmental retirement and other plans. She is recognized by The Legal 500 guide for her excellence in the employee benefits and executive compensation field and often speaks before industry groups on fiduciary matters. She is a graduate of the George Washington University School of Law, having served five years as a military intelligence officer in the U.S. Army before attending law school.