Reduce Fiduciary Risk With An Effective Investment Policy
January 5, 2016
Human resource officers and managers are often asked to chair or sit on a retirement plan committee responsible for administrative tasks. In this role, a committee member takes on fiduciary responsibilities to plan participants and beneficiaries, and can be held personally liable for fiduciary breaches under Federal law. As legal counsel, we endeavor to manage this risk for our clients through guidance on good governance, indemnification protection, and the adoption of effective policies. Effective management of employee benefit plans will meet this fiduciary duty to participants while at the same time improving results for employees and minimizing potential liability exposure of plan managers. We are sometimes asked to review a proposed investment policy statement or IPS related to a 401(k) or 403(b) retirement plan. Although these plans are not required to have an IPS, we recommend having one as a guide for prudent plan administration. Most plan service providers and record keepers will have a standard form or model available for use by the employer adopting the plan. Models can be useful, but any model should not be adopted without discussion and agreement with its terms. Because an IPS is a policy of the employer in its role as plan administrator, and not one of the outside record-keeper or financial consultant, it’s important for a plan committee to discuss and “own” its policies. Furthermore, a carefully-designed policy will not create additional responsibilities for a plan committee or officer beyond those imposed by law. An effective IPS will describe the roles and duties of a plan committee, other responsible officers, or plan service providers. It provides a framework and process for investment decisions as well as indemnification for employees who are charged with fiduciary duties. In many cases, there may be a financial advisor or consultant who is engaged to carry out the policy in some capacity. Once a policy has been discussed and adopted, it is an aid in running efficient committee meetings and in working effectively with outside service providers. Adopting a well-crafted IPS is an important element of prudent plan administration. An IPS should not dictate how many investment choices will be available for participants or the asset categories to be covered by plan options. Using factors described in the policy, a plan committee can handle the tasks of monitoring current options, assessing their potential for future performance, and making changes in a plan’s fund options. By creating and following a disciplined investment policy, a plan committee greatly reduces its risk of fiduciary liability when investment markets become volatile. There is a downside in adopting an IPS and then ignoring it. Our experience has been, however, that once discussed and adopted, an IPS brings better focus and engagement by committee members, more efficient meetings, and a higher level of fiduciary performance on behalf of plan participants. We have developed model policies that, together with proposals from plan service providers, can form the basis for your own policy.