Posted on by Jerome.Pfeffer


As a retirement plan specialist, I find myself having regular conversations surrounding 401k regulations and procedures. Lately, many questions seem to be around best practices and 401(k) plan documents, so in this article I’d like to discuss your plan’s Investment Policy Statement (IPS) and answer a couple of common questions.

What is an Investment Policy Statement?

When it comes to your company’s retirement plan, an IPS is like a road map. It serves as an outline for fiduciaries on the investment committee and provides clear guidelines for all investment decisions and responsibilities of each party. A well-written investment policy statement should:

Does my 401(k) plan require an Investment Policy Statement?

Short answer: No. Although 90% of defined contribution(DC) plans maintain an IPS[1], the Employee Retirement Income Security Act of 1974 (ERISA) does not require it. However, if you choose to adopt one, it is important that you follow it! Failure to follow plan documents is a fiduciary violation that may carry some heavy consequences:

Class Action Lawsuits |Tussey vs. ABB, Inc., a 2012 landmark case where $36.9 million in damages was awarded to plan participants, top fiduciary violations included:  failure to follow the plan’s IPS.[2]

DOL Audits | In 2016, approximately 68% of the audited 401(k) plans were forced to pay fines, penalties, or reimbursements for plan errors: the average fine was upwards of $570,000.[3]  Among the top 3 most common ERISA violations: failure to follow plan docs.[4]

What should be in an Investment Policy Statement?

This robust document provides a framework for decision-making, it should be written out in a way that allows fiduciaries flexibility. To use the analogy from before: it should be a road map, not a chauffeur. In addition to the standard items that should appear in your plan document, consider spending some time in the following areas:

  1. Plan Purpose: Think of this as your plan’s “why,” your mission statement. Why does your plan exist? Consider including your intent to comply with the safe harbor provisions of ERISA section 404(c).
  2. Committee Roles & Responsibilities: Outline the roles and responsibilities of the investment committee, custodian, investment consultant and investment manager. Additionally, this section can lay the frame-work for committee meetings: when and what will be discussed during meetings?
  3. Fee Review: Your plan is not obligated to select the lowest cost fees, but instead determine that fees are reasonable in relation to the services provided. This section should outline a process for fee review, consider including sections on regularly benchmarking fees and doing rfp’s.
  4. Participant Education: This is a significant committee responsibility; use he IPS to outline methods, resources and frequency of education. For a more in-depth document, you may consider adopting and Education Policy Statement (EPS) as well.
  5. QDIA or TDF Review: 9 out of 10 plans have a qualified default investment alternative (QDIA) as the default investment fund[5], but many IPS documents don’t discuss QDIA processes.[6] These highly popular investment options have multiple layers of fees, different glide paths and combinations of investments. It may behoove you to add a comprehensive QDIA section covering a process for selecting and monitoring your default investment.

Why have an Investment Policy Statement?

So, if it is not required and it sounds like a lot of work, why should my company adopt an IPS? I would say the overwhelming number of pros out-weight the cons. The outline of a prudent process can add a layer of fiduciary protection if the Department of Labor came knocking on your door, after all, it is one of the primary documents the IRS and DOL request when they conduct plan audits.

Remember, if you choose to adopt and IPS, the worst thing you can do not follow it. That would be like hopping in your car, plugging your destination in on the GPS, and intentionally turning left when you were advised to make a right.

At Investment Solutions Group, we understand that process is key. Let us help you to establish a prudent process that strives to better manage liability and meet your fiduciary responsibility.

Securities and Advisory Services Offered Through LPL Financial. A Registered Investment Adviser. Member FINRA /SIPC.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. This material was prepared for Jerome Pfeffer’s use.

Plan Sponsor Use Only – Not for Use with Participants or the General Public.

[1] Callan Investments. “2017 Defined Contribution Trends Survey.” Jan. 2017

[2] Wagner, Marcia. “Legal Update: Tussey vs. ABB, Inc.” Jan. 2015.

[3] Department of Labor. “Fact Sheet. EBSA Restores Over $ 777.5 Million to Employee Benefit Plans, Participants and Beneficiaries.” EBSA Monetary Results. 2016.

[4] Donaldson, David. “Plan Management: Through the Eyes of a Former DOL Senior Investigator.” ERISA Smart. 2015.

[5] Callan Investments. “2017 Defined Contribution Trends Survey.” Jan. 2017

[6] Buckman, Carol. “IPS (Investment Policy Statement) Gaps?” Aug. 28, 2017.