PLANADVISER - March/April 2019 - 56

fiduciary fitness
An IPS Is Not Required
But there's no good reason for a plan not to have one
CLIENTS will occasionally ask whether an investment
policy statement (IPS) is a required document under the
Employee Retirement Income Security Act (ERISA). The
technical answer to the question is clear. The Department
of Labor (DOL) has never taken the position that an IPS is
a required document, and courts have generally concurred
that ERISA does not impose a fiduciary duty to create an
IPS. See, for example, Taylor v. United Technologies, although
one outlier to this general rule is Liss v. Smith, in which the
district court held, under the facts of that case, that failure
to have an IPS was a breach of fiduciary duty.
At the same time, there is widespread
plan committee changes over time; and clearly sets forth
the roles of parties involved in the investment process.
Other items that are frequently addressed in an IPS are
ERISA Section 404(c) compliance; participant education;
asset classes and benchmarking; whether white labelling
of funds is appropriate; proxy voting; environmental, social
and governance (ESG) investing guidelines; and the prohibition
of certain investments.
In light of recent discussions concerning the extent
to which a plan's fiduciaries can provide guidance to an
agreement that having an investment policy
statement is a best practice under ERISA, and
the overwhelming majority of 401(k) plan
sponsors have an IPS in place-if for no other
reason than the practical one that, if the DOL
audits a plan, one of the first documents it will
request is the plan's IPS. Such activity is consistent
with the DOL's view, stated in Interpretive
Bulletin (I.B.) 2016-01, that " the maintenance
by a plan of an IPS to further the purposes of
the plan and its funding policy is consistent with the fiduciary
obligations under ERISA Section 404(a)(1)(A) and (B). "
In addition, because the terms of the statement are an
exercise of fiduciary responsibility, an IPS for a plan may
need to take into account its funding policy and liquidity
needs, as well as issues of prudence, diversification and
other fiduciary requirements of ERISA.
Because the document is not legally required, the DOL
may not impose a fine or penalty for its absence, but being
unable to produce one is an inauspicious manner in which
to commence an audit. A second equally important reason
to adopt an IPS is that a court, in determining whether there
has been a breach of fiduciary duty in connection with an
investment decision, will look to the process by which the
decision was made. While there is no uniform checklist of
activities that a prudent fiduciary must perform, having
an IPS in place can be a useful document to provide in this
context, with the caveat that, because an IPS will be treated
as one of the documents under which a plan is operated,
failure to follow its terms can itself give rise to a breach of
fiduciary duty under ERISA.
Focusing upon other benefits of an IPS, it allows the
relevant plan fiduciaries to have a framework within which
to make decisions; provides a guide to the selection, monitoring
and termination of investment decisions; provides for
consistency in treatment as the composition of the relevant
There is widespread agreement that
having an investment policy statement
is a best practice under ERISA, and
the overwhelming majority of 401(k)
plan sponsors have an IPS in place.
investment manager within the context of an ERISA Section
3(38) arrangement, it is interesting to consider the extent
to which a plan's fiduciaries can exercise control over an
investment manager through an IPS (assuming, of course,
that the primary draftsperson of the IPS was other than the
plan's investment manager). The DOL has indicated that a
named fiduciary that appoints an investment manager may
expressly require, as a condition of the investment management
agreement, that the manager comply with the terms
of the IPS that set forth guidelines on what investments the
manager is authorized or not authorized to make.
Because the IPS is one of the documents and instruments
under which the plan is operated, the investment
manager would be required to comply with it insofar as the
policy directives or guidelines are consistent with ERISA.
Because there are no guidelines as to the permissible level
of detail in an IPS, that document could be one way in which
a named fiduciary could exercise a level of control over the
investment strategy of an investment manager.
Marcia Wagner is an expert in a variety of employee benefits and
executive compensation areas, including qualified and nonqualified
retirement plans and welfare benefit arrangements. She is a summa
cum laude graduate of Cornell University and Harvard Law School and
has practiced law for 32 years. Wagner is a frequent lecturer and has
authored numerous books and articles.
56 | planadviser.com March-April 2019
Art by Tim Bower
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