Do You Need an Investment Policy for Your Retirement Plans?

Pursuant to Department of Labor guidance, a “statement of investment policy” provides fiduciaries responsible for plan investments with written guidelines or general instructions concerning various types of investment management decisions.  Typically, an investment policy will establish criteria and procedures for the selection, monitoring, removal, and replacement of plan investments.

Unlike the “funding policy” required for plans under Section 402(b) of ERISA, there is no requirement under ERISA that a plan have a written investment policy (although there have been court cases to the contrary).  However, ERISA does require that fiduciaries prudently select and monitor plan investments.  In this regard, ERISA requires what is often referred to as “procedural prudence.”   Thus, the focus is not the actual performance of the investment, but rather the process used to select and evaluate the investment.

Ostensibly, a core element of procedural prudence would be the establishment of a procedure.  While it may be possible to have a procedure that is not reduced to writing, that would have obvious limitations.

As with committee charters, some employers have expressed concerns over having written investment policies (i.e., just another set of rules the fiduciary could fail to follow).  However, a properly designed investment policy will preserve an element of discretion for the fiduciary so as to strike a balance between having guidelines and requiring mechanical adherence to those guidelines.

Considering the importance of being able to show appropriate process in this context, the benefits of a written investment policy substantially outweigh the potential down falls.  Further, the investment policy statement is a commonly requested document during a Department of Labor audit.

Christopher G. Guldberg has been practicing in the employee benefits and executive compensation areas since 1992 and is a senior member of the Firm’s benefits practice. Mr. Guldberg advises on a wide range of benefits issues including design, implementation, operation and termination of tax-qualified retirement plans and welfare benefit plans. He assists with all aspects of regulatory compliance associated with employee benefit plans and regularly advises clients on ERISA's fiduciary and prohibited transactions provisions. He also has helped clients correct benefit plan defects through DOL and IRS voluntary correction programs and has assisted clients with negotiated settlements with regulatory authorities.