Plan sponsors, do you have an investment policy? (What you need to know to be compliant)

May 18, 2021


You’ve probably heard that recent litigation over breaches of fiduciary duty under the Employee Retirement Income Security Act (ERISA) has been making a stir. It’s important to recognize that fiduciaries of retirement plans for small businesses have the same legal obligations as those for large plans, and lawsuits can (and do) occur for companies of any size.

Here’s what plan sponsors need to know in order to keep their retirement benefits plan management practices smart, well-documented, and in compliance.

Fiduciary responsibility and the Investment Policy Statement

Fiduciary isn’t just a fun word to say—it’s important for plan sponsors to grasp the full context, since they have accepted fiduciary responsibility for their company’s retirement plan.

In a nutshell, “fiduciary” means held or given in trust. In accepting the fiduciary duty of acting as Plan Sponsor, you are committing to act in the best interests of the plan beneficiaries.

That’s where the Investment Policy Statement (IPS) comes in. The purpose of an IPS is to provide plan sponsors with a framework for making decisions about plan investments. Though not officially required, it’s one of the first things the IRS will ask for in the event of an audit.

In fact, many of our key learnings from 2020 audits related to documentation of responsible Plan management.

A well-written IPS should outline your plan’s purpose and objectives. It should also state your company’s investment philosophy.

What should be included in your plan’s Investment Policy Statement?

To make your IPS as comprehensive as possible, and to protect you and your company in the event of an audit or litigation, include the following:

  • Details on plan oversight: Plan Trustees and anyone else responsible for overseeing the plan should be clearly identified, and their roles clearly defined. If you have any third parties involved in your Plan management, be sure to include them in this list as well.
  • Investment fees: Carefully assess your plan investment fees, and record the outcome of that assessment in your IPS. Be sure that fees are commensurate with industry standards for similar services.
  • Investment selection: State which types of investments your plan allows, and which types of investments it prohibits. 
  • Monitoring performance: If an asset is under-performing compared to similar investments, note details around when and why you might decide to put an investment on a “watch list.” Plans are anything but “set it and forget it”—Plan Trustees and advisors should meet annually at a minimum to monitor Plan fees and investment performance.
  • Criteria for investment evaluation: Related to the above, write down criteria for removing investments from your portfolio, and how you’ll go about replacing them. 
  • Revenue sharing: The revenue sharing agreement should be disclosed to plan participants, and fully accessible to them at any time. 

Why is an Investment Policy Statement important?

First, you must be able to produce one when the IRS comes knocking on your door for an audit

But here’s an even more compelling reason: a well-written IPS is a proactive strategy. It helps safeguard plan sponsors against lawsuits and other unwanted complexities. For small plan sponsors in particular, a lawsuit can be catastrophic, so decrease your liability in advance with a well-thought-out and well-executed IPS. 

If your investment policy requires review, we’re here to help! Contact us today for more information and to schedule your virtual appointment with Cassell Plan Audits at 630.886.7669.

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