401(k) advisers push for more general investment policies as fiduciary safeguard

The policies governing plan sponsors’ investment decisions in 401(k) plans are adopting language that’s more general rather than prescriptive in nature, as a way to safeguard against fiduciary breach and future legal action, according to advisers and legal experts.

Being overly specific when codifying an investment policy statement, a document outlining parameters for supervising, monitoring and evaluating investment decisions, provides greater chance for a client to make a mistake, they say.

These decisions could extend to the frequency of reviewing an investment policy, choice of asset classes and asset allocation, removal or addition of a fund, and fees, for example.
“You want to have a policy which outlines your process, but if it is so tight it handcuffs you into having to make a decision, you not only risk running afoul of it but having to take action when you might not want to,” Evan Melcher, a senior consultant at FiduciaryVest, a consulting firm, said.
Accordingly, advisers have amended language in their clients’ document to paint investment decisions in broader strokes. In this way, the document is more of a road map or guideline, rather than a strict rule.
Mr. Melcher recommends words such as “usually” instead of “will,” and “typically” rather than “must” when describing particular actions. For example, saying a periodic review of plan investments may, rather than will, include style, investment risk and return.
Or, if a fund underperforms a benchmark in consecutive quarters, saying the plan committee “may” consider adding another fund in the same asset class, freezing new fund contributions, or putting the fund on a watch list in response would be better than saying the committee “will” remove a fund in that circumstance, Mr. Melcher said.
Using more general language makes clients more bulletproof against litigation, according to Barbara Delaney, founder and principal of StoneStreet Advisor Group.
Such 401(k) litigation, which often attacks excessive investment fees, has become more commonplace within just the past year or so. Violating an investment policy statement represents a fiduciary breach under the Employee Retirement Income Security Act of 1974.
The litigation has heightened attention to the particular language in an investment policy statement, according to Bruce Ashton, a partner in the employee benefits and executive compensation practice group at Drinker Biddle & Reath.
“In some of those cases there’s been a comment in the court decisions about the fact the fiduciaries didn’t follow the terms of their own investment policy statement,” Mr. Ashton said. “It leads us to think the IPS may have been more prescriptive than it needs to be.”
Of course, 401(k) plans aren’t required to have such a document. But the Department of Labor commonly asks during regular, random retirement plan audits if plan sponsors have an IPS, Ms. Delaney said.
Many advisers and attorneys view it as a best practice for a plan to have one, because ERISA is a process-oriented statute, and the best way to demonstrate an investment process is by having it codified.
Without one, it would be much more difficult to demonstrate to DOL auditors how committee members fulfilled their fiduciary duty, Mr. Ashton said.
Anthony Domino, Jr., managing principal at Associated Benefit Consultants, cautions advisers to find a balance — language that’s not so specific it handcuffs clients, but that’s also not too broad that it also exposes them to fiduciary-breach allegations.
“I think it’s a double-edged sword because it’s certainly more defensible the broader it is, but it’s also more open to attack, or the perception someone may have it’s not being followed if it’s too broad,” Mr. Domino said.
“It’s not black and white,” he added.