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Best Practices for the IPS.

Byline: John Manganaro

Art by Paige Vickers

lthough not a required document, an investment policy statement (IPS) is now in place with 65% of plan sponsors, according to the 2016 PLANSPONSOR Defined Contribution (DC) Survey. If the document exists, a best practice for the retirement plan committee is to review the statement regularly, to see whether it needs updating and to confirm that the committee itself followed the stated process during the preceding year.

According to experts from Strategic Benefit Services (SBS), Rensselaer, New York, employers should begin either crafting or reviewing their IPS by gathering any plan documents that pertain to investing. At a minimum, the experts wrote in a blog post, these may include trust documents, summary plan descriptions (SPDs), written minutes of committee meetings, current vendor service agreements, investment performance reports, enrollment reports, participant educational material, procedural manuals and Form 5500 paperwork.

These documents should help plan sponsors determine exactly what process and detail should be contained in the formal IPS, SBS says, concluding that, especially in today’s challenging environment, efficiency and litigation protection are easier to attain when the IPS is “a well-articulated document” designed to promote careful investment selection and ongoing investment evaluation, “which are fiduciary obligations.”

Also important, the experts stress, is striking a balance between specificity and flexibility in the IPS.

The document opens with a short, simple list of the investment options the plan contains. This is followed by nearly two full pages describing in general--but still very careful--terms the objectives and purposes of the plan. This section names no specific funds or products, nor does it identify any hard-dollar goals or step-by-step processes for the plan or its participants. Next, the IPS very cautiously enumerates what responsibilities lie with the various vendors and with the plan sponsor, focusing much more on naming what these duties are than expressing exactly how they must be met.

The draft IPS spells out specifically what benchmarks will be used to evaluate the funds in various peer groups in the plan, but it refrains from detailing a decision process to retain or terminate an investment option. According to fi360, the “watch list decision” cannot be made by a formula. Thus, the draft IPS expressly states that “extraordinary events do occur that may interfere with the investment option’s ability to prudently manage investment assets. It is the committee’s confidence in the investment option’s ability to perform in the future that ultimately determines the retention of an investment option.”

The IPS Protects … Until It Doesn’t

Jim Phillips, president of Retirement Resources in Boston, makes a crucially important point about the value of an IPS by asking a simple-sounding question: “Does having an investment policy statement increase liability, or decrease liability?”

If you chose the first answer, he says, you are correct. And if you chose the second, you are also correct. The point is that, as a rule of thumb, sponsors should be very careful about the use of “shall,” “must” and “will” statements.

“In case the reason isn’t obvious, just picture a plaintiff’s attorney with a big smile on his face,” Phillips says. “Let’s say your IPS says a fund will be removed if it underperforms its benchmark for three consecutive quarters. If you haven’t followed your IPS, you could be financially responsible for any losses incurred subsequent to the point at which the IPS required that fund to be removed.”

Even if the IPS is not a required document, recent analysis from professors Max M. Schanzenbach of Northwestern University School of Law and Robert H. Sitkoff of Harvard Law School considers how a carefully crafted IPS can benefit everyone involved in the retirement investing space touched by it.

takeaway from the pair’s analysis, titled “Fiduciary Financial Advice to Retirement Savers: Don’t Overlook the Prudent Investor Rule,” is that, like so many of the rules overseeing the delegation of tax-qualified retirement plan dollars, the modernized IPS ought to be “principles-based rather than prescriptive.” The researchers observe that no type of investment is categorically permissible or impermissible in the eyes of investment regulators. “Instead, a fiduciary must evaluate risk tolerance and investment goals; choose a commensurate level of overall portfolio market risk and expected return; and avoid wasteful, diversifiable risk. Because of the multiplicity of relevant considerations … application of the prudent investor rules is specific to an investor’s circumstances. Accordingly, the rules permit a wide variety of investment techniques.”

What Not to Consider Matters

A fund manager personnel change has become a common trigger to put a fund on a watch list, Morningstar reports in a recent research paper, “The Aftermath of Fund Manager Changes.”

Investment policy statements are far from standardized, but the research shows that many mention, in some capacity, the plan’s general objectives, and investment structure and criteria. Further outlined will be the ongoing investment monitoring and evaluation processes, which may include the fund-manager change trigger. And once a fund manager has been placed on a watch list, it may take only one or two quarters of slightly below-benchmark returns to lead to a fund’s potentially disruptive dismissal.

The Morningstar research finds “no relationship between any type of management change and future returns.” In fact, the highest-performing funds are those “given the benefit of the doubt by investors” when there is a management change or other transitory issue.

The analysis concludes, it is much more sensible to adopt and enumerate a flexible approach for monitoring manager changes, formalizing that in the IPS, and striving first and foremost to identify whether the change represents a true policy modification or simply a shift in transitory personnel.


* Although an investment policy statement is not a required document for a DC plan, most plan sponsors have them in place.

* To create or update a plan’s IPS, begin by reviewing all plan documents that pertain to investing in any way.

* Plan sponsors should look to strike a balance between specificity and flexibility in the IPS.

* Focus more on naming what the IPS requires than expressing exactly how specific duties must be met.
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Date:Oct 1, 2017
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