Managing Investment Liability
ERISA demands that fiduciaries demonstrate their performance - consistent with their duties of care and diligence. One such area that this performance is of paramount importance is in the management of the plan’s assets and the plan's underlying investment options.
An Investment Policy Statement (IPS) is a plan instrument that is mandated under ERISA. An IPS is a document that clearly and understandably sets forth the investment goals and objectives of the plan, including the methods used by the plan sponsor and plan trustee(s) in the routine management of the plan’s assets. But equally important to having an IPS is using it to guide the decision making process with regard to the investment alternatives utilized by the plan.
An Investment Policy Statement should be provide the basic framework under which the plan will operate, with regard to making decision regarding what are investment options to be made available within the plan and for its participants. As a result, it is generally accepted that a plan’s IPS should:
- Set forth the basic objectives for the plan
- Define the permissible investment vehicles to be used by the plan
- Describe the investment categories that will be made available within the plan
- Define the roles & responsibilities of those charged with managing the plan’s assets
- Set forth the investment alternatives selected for the plan
Alongside the construction of an Investment Policy Statement, fiduciaries must also establish the criteria by which they will evaluate and monitor investment alternatives for the plan. Therefore this process should be based upon objectives that are specific, measurable, achievable, results-oriented and time-based (i.e., SMART), and set forth in a written document that is used by fiduciaries and their service providers to effectively manage the plan in conformance with the IPS.
Commonly referred to as the Investment Selection & Review Procedures (ISRP), this document should outline the formal investment decision-making process and provide a framework to assist fiduciaries in objectively evaluating investment alternatives. Typically, an ISRP document would describe the quantitative and qualitative metrics used to evaluate investment alternatives, both for initial selection and ongoing monitoring.
Ongoing Investment Evaluations
Fiduciaries are required to consistently monitor and review their plans’ designated investment options, based upon the quantitative and qualitative metrics established in the Investment Selection & Review Procedures. Thereto, fiduciaries are required to make changes as determined by these periodic reviews, and communicate the reasons for the change as well as the methodology used in determining an applicable replacement investment. As a result, a fiduciary's failure to do so may expose them to claims of imprudence and provide no logical defense to refute such claims.