Intellectual Capital

Managing Investment Responsibilities

Weighing the Options–Is an Investment Policy Statement Right for Your Plan?

Executive Summary

While most plan sponsors must follow essentially the same steps to administer their plan, how they manage their investment oversight role can vary a great deal from plan to plan.

  • Different retirement plans can have very different investment objectives.
  • There is a broad spectrum of investment solutions that may be employed to meet those objectives.
  • Each plan sponsor should consider defining its investment objectives and outlining a strategy for achieving those objectives.

Some plan sponsors create an investment policy statement (IPS) to provide a framework for managing investment decisions. A recent study found that 83% of the surveyed plans had implemented an investment policy statement.1 Yet, not all plan sponsors believe an IPS is the best vehicle for defining a plan sponsor’s strategy for investment oversight.

Following is a brief discussion of some of the factors plan sponsors may want to consider as they evaluate the role of an IPS with respect to their plan.

What Are the Investment Responsibilities of a Plan Sponsor?

The plan sponsor (the employer adopting the plan) typically serves as a “fiduciary” for the 401(k) plan or other defined contribution plan adopted by the business. The plan’s fiduciaries are responsible for managing the plan, including selecting and monitoring the plan’s investment options. When making plan decisions, fiduciaries are subject to strict standards of conduct imposed by the Employee Retirement Income Security Act of 1974 (ERISA). These standards require them to
 

  • Act solely in the best interests of the plan participants and beneficiaries
  • Make prudent decisions
  • Diversify investments to the extent needed to reduce the risk of large losses to plan assets
  • Follow the terms of the plan document
  • Ensure that only resonable fees are paid from plan assets for plan services and investments
     
Procedural prudence when managing investment responsibilities is key to complying with the ERISA fiduciary rules. A fiduciary is not required to pick the best performing investment option or to make investment decisions subject to one strict standard. Setting objectives, developing a due diligence process, consistently following that process, and keeping records of due diligence activities can help satisfy this important fiduciary responsibility.

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Managing Investment Responsibilities

A brief discussion of some of the factors plan sponsors may want to consider as they evaluate the role of an IPS with respect to their plan.

1Deloitte, Annual Defined Contribution Benchmarking Survey, 2015 Edition

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