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How an Investment Policy Statement Can Help Retirement Plan Sponsors Prevent Liability

investment policy statement


Many employers today offer a 401(k), 403(b) or other retirement plan for their valued staff. That’s a great thing, but it comes with significant responsibility.  If you’re a plan sponsor, you’re charged with ensuring the retirement funds, and the plan itself, are administered properly.  That makes sense, since your employees are depending upon you to safeguard their retirement savings.  So it’s no surprise there’s significant liability as well—for your organization, and potentially for you too.

Yes, that’s actually personal liability. If you’re in a position of responsibility for the plan, you are usually considered a fiduciary, and you must always put the participants’ interests first. Failure to do what’s required of you could be something that puts your own assets as risk.  (Read more about this liability issue in our previous article).

That’s even more important today than it was a decade or two ago, since we’re now dealing with a new reality: a growing trend of lawsuits against retirement plan sponsors. Originally, these lawsuits focused on only the largest plans, but lately smaller plans have been targeted, too.

With increased media attention to these lawsuits, more attorneys are watching.  The emergence of retirement plan rating websites like Brightscope.com are also gaining in popularity, making it unlikely that this trend of litigation is going to end anytime soon.


Retirement Plan Lawsuits Continue Forward

If anything, the trend continues to build momentum.  In fact, now all sizes of plans are being targeted, which should be concerning for anybody who runs one.

Of course, not all litigation will make it all the way to court.  Some of the cases are settled and some don’t have merit to continue.  But there is one constant:  all of these cases, realistic or not, cost money to defend.  And that process is notoriously expensive.

So clearly prevention is key.  Now is the time to make sure you’re doing everything you can to prevent liability.

Enter the Investment Policy Statement

One critical step to preventing liability is to make sure your plan investments are selected and managed properly. The best way to manage that process is through the creation of an Investment Policy Statement (“IPS”). While not technically required, this document can go a long way in clarifying and documenting the goals and policies of the plan, and protecting you and your organization rom liability.

What is an Investment Policy Statement?

An investment policy statement, or “IPS,” is a document that outlines the policies that the retirement plan will adhere to. The IPS is not required by law. However, this is one of the documents the IRS and Department of Labor will ask for when conducting plan audits, and a properly written and executed one can help make these processes go more smoothly. It is also a key document to help you and your plan prevent liability, when properly constructed and adhered to.

How Common is an Investment Policy Statement?

According to the Callan Institute Survey, an estimated 90% of retirement plans maintain an Investment Policy Statement. However, this has traditionally been found most commonly with large plans. Regardless, with the increasing litigation against plans of all sizes, it makes sense for every plan to use this valuable document to guide investment decisions.

What you’ll find in an Investment Policy Statement

Most investment policy statements will include the following:

  • A list of eligible investments that may be included in the plan
  • A list of prohibited investments (such as individual stocks)
  • A description of the roles and responsibilities of the plan participants (which may include an investment committee, custodian, investment advisor, etc.).
  • A description of the investment selection process
  • A description of the investment monitoring process
  • A description of the process used to replace a poorly performing investment option

Following the Investment Policy Statement

Once you’ve established an IPS, it’s vital to follow it very closely. In fact, there’s been recent litigation over a plan that strayed from its IPS.

According to the Callan Institute Study, however, fewer than two-thirds of plans had reviewed their IPS in the past year. This is a recipe for a future problem.

Instead, your IPS should be an integral part of your administration process, not a document to keep on file in the back somewhere. Auditors as well as any potential judge or jury would like to see that all aspects of your administration are formal and disciplined.  So be sure to:

  • Use your Investment Policy Statement as a reference point in the administration process
  • Review it formally and frequently to determine if any changes are needed
  • When changes are identified, modify it in a timely manner

Most importantly: Stick to it. Any plan or policy is worthless if it’s not adhered to, and when it comes to protecting the assets that are entrusted to your organization, you owe it to your employees to make sure every decision is sound, reasonable, and puts their interests first.


(This was an excerpt from our free eBook, How to Reduce Your Potential Liability as a Plan Sponsor.)

Download our Free EBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

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