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Document, document, document


So, like all policies that your company may have—how do you actually prove that you are following your plan’s Investment Policy Statement (IPS)? If the first question a Department of Labor Auditor asks is “where’s your IPS,” documentation that you are following your IPS is likely to be the second.

As a plan sponsor, you should be able to clearly demonstrate that you are monitoring and tracking all aspects of the plan’s IPS on an ongoing basis. You should also be able to show that you document your actions. The IPS should apply the same methodology that went into the initial section of funds, to the replacement of funds that don’t meet the IPS standards.  In this way, the plan will have a consistent method that can be followed by whomever is on the Investment Committee at any given time. It’s a process that is the essential aspect to the IPS.  No one wants to be in a plan that’s negligent in its duties, so having an IPS that is written and documented is critical.

When you follow the process, participants will not only know, but appreciate that you are providing a true benefit to them. Remember, it’s not just your money in the plan—as a fiduciary, you are responsible to each and every participant. You must keep their best interests ahead of your own—and you must be able to prove that you’re doing so. 


Due Diligence


Last time, we discussed the components of an Investment Policy Statement (IPS), an essential element to any company retirement plan. A great deal of the IPS is centered on the plan’s investment lineup, or the investment options (funds) available to each participant in the plan. This is for good reason: your plan’s investment lineup not only plays a role in participant outcomes, but each fund plays a role in the overall cost of the plan to both the company and participants.

Due diligence should include:

  • regulatory oversight;
  • minimum track records for each fund;
  • stability of the underlying organization (fund company);
  • minimum asset size;
  • holdings consistent with style;
  • correlation to style or peer group;
  • expense ratios and fees;
  • performance relative to assumed risk;
  • performance relative to a peer group;
  • fund track records over 1, 3, 5, 10 year periods.

The plan’s IPS should clearly define the due diligence process used to select and replace any investments that don’t meet the standards outlined. This is a critical aspect of your IPS, but also toward meeting your fiduciary responsibility toward participants in the plan.


Investment Policy Statements: What are they? Why do I need one?


If you are a retirement plan sponsor, you should already be familiar with an Investment Policy Statement (IPS). Of all the documents related to your company’s plan, it’s essential that the plan has—and follows—an IPS. In fact, it may be the first item that a Department of Labor audit will ask for. As plan sponsor, you personally have a fiduciary duty to plan participants, so it’s crucial you understand the components of an effective IPS.

Think of it this way: a new building begins with an architect and an engineer, who together draw blueprints for the builders to use in construction. Without blueprints, the builders won’t have a plan to follow to ensure that the resulting building is structurally sound. The IPS represents a plan’s blueprint—it assists both the Investment Committee and plan sponsor to effectively supervise, monitor and evaluate the management of the plan.

The IPS should:

  • outline the methodology used to select funds for the participant menu;
  • outline the duties and responsibilities of all parties involved in the plan (investment committee, custodians and investment advisors);
  • identify responsible fiduciaries;
  • define asset guidelines for the plan;
  • identify benchmarks used to track performance for each investment option;
  • determine the relevant indexes and peer groups identified for each fund;
  • define the process used to monitor performance, and what happens when a fund fails to meet its benchmarks;
  • identify and account for all parties receiving compensation related to the plan;
  • be in written format, and reviewed annually (at a minimum) by the Investment Committee.

Sound like a lot? This is just a brief outline of some of the elements in an Investment Policy Statement. In my practice, I’ve met with many plan sponsors who were unaware of what an IPS is, and how it should work. In upcoming posts, I’ll further explain the components of an IPS, how to go about proper due diligence, and why it’s important to document that you’re following your own guidelines. In the meantime, if you’re concerned with how your plan stacks up, feel free to contact me for a free, comprehensive review.