PLANADVISER - September/October 2019 - 56

ERISA vista
An IPS 'Sets'
The Standard
Once adopted, the document must be followed
If an IPS is developed, a best practice is that it should,
Question: I'm new as an adviser, and while I've read that an
investment policy statement, or " IPS, " isn't required under ERISA
[Employee Retirement Income Security Act], it seems like many of
our clients have them. What do I need to know about them?
ANSWER: ERISA requires that investment fiduciaries
adhere to generally accepted investment theories and
prevailing investment industry standards. This entails
decisions about asset classes, the criteria
for the selection and monitoring of investments,
the circumstances that may
warrant removal and/or replacement of an
investment, and more. An IPS can be used
to describe the guidelines for this decisionmaking
process.
As stated by the Department of Labor
(DOL) in its 2016 guidance, Interpretive
Bulletin (IB) 2016-01, an IPS is a " written
statement that provides the fiduciaries who
are responsible for plan investments with
guidelines or general instructions concerning various types
or categories of investment decisions ... "
The DOL also said that the determination of the terms
at a minimum, contain:
* A description of the plan's objectives and needs-e.g.,
...it's apparent
that an IPS is an
important way
to manage risk...
of an IPS is an exercise of fiduciary responsibility. The DOL
then acknowledged that maintenance of an IPS " designed
to further the purposes of the plan and its funding policy is
consistent with the fiduciary obligations set forth in ERISA. "
So, if maintenance of an IPS is consistent with ERISA
fiduciary obligations, does the failure to have one constitute
a fiduciary breach?
There is one court decision that found this to be the
case. In the 1998 decision of Liss v. Smith, a New York district
court found that an IPS was " necessary to ensure that the
plan investments are performing adequately and meeting
the [plan's] actuarial, liquidity and other needs. " The court
then concluded that the statement's absence, coupled with
the other acts and omissions of the fiduciaries, constituted
a breach of fiduciary duty.
Based upon this decision and the DOL guidance, it's
apparent that an IPS is an important way to manage risk by
demonstrating compliance with ERISA fiduciary responsibilities.
In our experience, most investment advisers for
ERISA plans include assistance with preparation of an IPS
as a part of their services. And 3(38) advisers, who have
discretion over ERISA plan assets, usually develop an IPS
for a client's plan as a framework for making investment
decisions and demonstrating compliance with their fiduciary
duties.
compliance with ERISA 404(c) safe harbor rules, satisfaction
of qualified default investment alternative (QDIA)
requirements, etc.-and guidelines about how the fiduciaries
intend to achieve those objectives;
* A description of the allocation of roles among the various
fiduciaries with investment authority-
e.g., the plan sponsor (or committee), the
trustees, the investment adviser and/or the
3(38) investment manager;
* A description of the process for
selecting investments, including the types
of investments to be included and the
criteria for selecting and monitoring the
investments;
* A description of the plan's policies, if
any, regarding environmental, social and/
or governance (ESG) factors and a description
of the ESG-related metrics and analyses for such
investments;
* A description of the selection and monitoring process
for certain types of specific investments, such as targetdate
funds (TDFs), money market
funds, stable value
investments, and/or guaranteed contracts; and
* A description of the process for monitoring investments,
including circumstances that may warrant placing investments
on a watch list or removing and/or replacing them.
Once adopted, the IPS is considered a plan document,
and, therefore, the investment fiduciary has an obligation to
follow it. If the IPS is worded too rigidly, an investment fiduciary
who fails to follow its specific terms will be in breach
of his fiduciary duties. However, an IPS can be drafted to
provide flexibility for the investment fiduciaries. For example,
the document could say that its provisions are guidelines for
the fiduciaries to consider but that they are not binding-that
instead, the fiduciaries would be expected to use their discretion
and judgment in making decisions.
Fred Reish is chairman of the financial services ERISA [Employee
Retirement Income Security Act] practice at law firm Drinker Biddle &
Reath LLP. A nationally recognized expert in employee benefits law, Reish
has written four books and many articles on ERISA, pension plan disputes
and audits by the IRS and Department of Labor. Joan Neri is counsel
in the firm's financial services ERISA practice, where she focuses on all
aspects of ERISA compliance affecting registered investment advisers
and other plan service providers.
56 | planadviser.com September-October 2019
Art by Tim Bower
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