How do you limit liability on your retirement plan?
The foundation of every employer-sponsored plan should be a written document that outlines the investment policy you use to select and manage the investments in your plan.
Not only should all plans have this document clearly written, but they should review it as they review their investments to help ensure the plan is being managed in accordance with the established investment policy.
The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. A Solid Foundation™ is a key step in this process. By completing this course, you will clearly define the criteria you set forth for the selection of investments and asset classes in your plan, expected rates of return and index comparisons, methods for determining when to change investments in your plan, as well as the plans goals and objectives. This course provides you with the business plan you will use to manage the investment monitoring process of your retirement plan, as well as allow you to review your existing investment portfolio to verify you are following the guidelines you set forth.
While you cannot eliminate liability, you can limit it with the USE of an Investment Policy Statement. ‘Use’ is emphasized because while better than 50% of plans state they have an Investment Policy Statement, most are never reviewed or actively engaged while monitoring plan investments.
An Investment Policy Statement (IPS) is a written document with the purpose of providing meaningful direction and guidance for trustees and investment professionals regarding the strategic placement and management of investment assets based on established and documented investment goals and objectives.
The Investment Policy Statement should be updated as conditions warrant. Many plan sponsors have elected to use a target date strategy to satisfy the requirements for a qualified default investment alternative. However, not all of these sponsors have reconsidered their investment policy for these unique strategies. For example, if you are using one, have you documented your investment process for settling on a “to retirement” or “through retirement” glide path for your participants. In February of 2013, the Department of Labor released a press release clarifying the need to document this decision.
A comprehensive investment review documents the investment process you are taking to comply with ERISA’s investment monitoring requirement. Ongoing investment monitoring and review is the most labor-intensive and time-consuming activity of the investment process.
The best way to fully document monitoring the investment process is to conduct regular investment reviews that, at the least, document the following:
- What were the returns of the major asset classes and peer groups?
- How did each manager perform compared to their peers and benchmarks?
- Are there investments that no longer meet the initial selection criteria?
- What is the call to action—managers to be replaced, etc?
If you are using target strategies which you intend to qualify as a qualified default investment you need to also substantiate your decision for the glide path. The strategy glide path can be either a to retirement or through retirement. Which one you choose affects the volatility of the strategy.
A comprehensive investment review documents the steps you are taking to comply with ERISA’s investment monitoring requirement. Should formalize your investment policy into an investment policy statement (IPS), it should document compliance.
A formalized IPS must become an integral part of monitoring your plan’s investments as it sets the criteria for doing so, and failure to monitor your investments against the guidelines set forth in this document can be a breach of fiduciary responsibility. As a fiduciary, it is important to demonstrate prudence in your investment process. This demonstrates why having a formal IPS is so critical as this document becomes the roadmap for monitoring plan assets to show prudence in the reasons behind keeping or replacing investments within your plan.
Are you using independent investment monitoring tools that compare your investment results to your investment policy? Some providers that bundled their own investments with their recordkeeping services have an interest in showing their investments in only a positive light. It is especially important to use independent reports to help vet this conflict of interest.