Many plan operational documents stem from compliance requirements. Plan documents, summary plan descriptions, summary annual reports, beneficiary designations, and even enrollment forms are all required by law. Although these documents, particularly SPDs, may evolve to incorporate functions that go far beyond their simple compliance function, the principal reason for their existence is a regulatory agency’s mandate that the sponsor must adopt them as a qualification requirement. Conversely, investment policy statements (IPS) exist primarily because they are useful. Plan sponsor benefits from having a written investment policy, include:
- Documentation articulating the procedural prudence of the sponsor’s decision-making process insulates the sponsor against claims of breaches of fiduciary responsibility
- Defining how the Plan satisfies ERISA’s diversification requirements [404(a) or 404(c)] protects the sponsor against arguments that investment losses attributable to the exercise of participant control should be the sponsor’s responsibility
- Making investment decisions from a long-term strategic perspective improves the long-term viability of the program as a valuable employee benefit
- Establishing quantitative standards for investment performance transforms investment decision making from a matter of opinion to a matter of fact, and streamlines both the investment selection and ongoing investment monitoring processes
Drafting a written IPS represents additional work for the Plan Committee. However, once an effective policy statement has been developed, the time required by the Committee to select appropriate funds should drop significantly. A well-crafted IPS outlines the rationale supporting the investment categories to be offered, and the Plan’s criteria for selecting among funds in each category. Today, there are more than 29,000 mutual funds available, as well as thousands of collective funds, separately managed accounts, and other investment vehicles clamoring for the Plan sponsor’s attention. An investment policy statement helps sponsors focus on the subset of funds that best meet established criteria. Additionally, time committed to managing the investment program also declines. A well-crafted IPS sets fund performance reporting standards, and objective criteria for fund retention. Once monitoring procedures have been established, the Committee can prudently and efficiently review periodic performance reports, focusing only on funds that don’t directly satisfy retention criteria.