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.
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
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
• 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