Does Your 401(k) Plan Have an Investment Policy Statement?

A business law firm discusses a recent court decision involving plan fees and revenue sharing that all plan sponsors should be aware of:

Although investment policy statements are not required by the U.S. Employee Retirement Income Security Act (ERISA), it is highly recommended that every 401(k) plan have one. An investment policy statement (IPS) can protect the plan committee or other fiduciary responsible for investments by setting out procedures for fulfilling fiduciary responsibilities.

Although a good IPS can be a defense in a lawsuit asserting breaches of fiduciary responsibility, a recent court decision, Tussey v. ABB. Inc., reminds us that it is a double-edged sword-that is, there can be liability if you adopt an IPS but do not in practice follow it.

This case involved plan fees and particularly the way in which “revenue sharing” – the application of part of the expense ratio of plan investment funds to pay for record-keeping services – impacted other decisions made by the plan fiduciaries. Although the court made it clear that revenue sharing was not in itself an ERISA violation, the decision was premised on departures from the standards set out in the IPS. In this case, the departures occurred when fiduciaries agreed to overpay for record-keeping fees, selected the classes of fund shares made available to participants, and replaced one investment fund with another fund, motivated by the desire to increase revenue sharing. It also found the record-keeper liable for not applying the float on plan contributions for the benefit of the participants.

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