Step 2 Toward Fiduciary Wellness: Your IPS and Process
We opened yesterday’s entry with a reminder that fiduciary responsibilities are ongoing and process-based. Best practices suggest that fiduciaries achieve greater wellness when they follow three distinct steps: (1) define the process; (2) follow it; and (3) memorialize it. We recognized yesterday that your plan’s investments provide the greatest source of a threat to your fiduciaries’ wellness. With that in mind, let’s apply the three steps to your investment process. (Bear in mind that, although you may have transferred much of your investment responsibility to an ERISA 3(38) fiduciary investment manager, you still must monitor the investment manager. As a result, the following steps apply without regard to who bears the lion’s share of responsibility for your investment process.)
Defining the Process. Many of us have been in meetings with plan sponsors and asked whether they have any funds on a watch list. After a “yes” head nod, the conversation becomes challenging when we ask “What are you watching for?” It is startling for so many plan sponsors to not know the answer to that question.
A prudent investment process begins with the willingness to describe the process in an Investment Policy Statement (IPS). There are various approaches for the degree of specificity to include in the IPS, but we recommend objective standards that one can consistently follow. For example, if a fund has failed the IPS’s performance criteria for the last six quarters, prudent fiduciaries should probably consider whether “well, it was a great fund for me several years ago” is a reasonable justification for retaining the fund on the plan’s lineup.
Following the Process. Of course, an IPS can actually create issues for fiduciaries if not followed. That concern gives rise to the need to implement and follow a consistent process for applying the IPS’s criteria and confirming whether the IPS requires any funds to move to a Watch List or to be replaced. It’s also helpful if your trustees or committee members understand the process. They need not be able to recite each of the IPS criteria and guidelines from memory, but it is comforting when our clients understand the process to the point they can engage in deeper discussion about its outputs. This is more likely to be the case if your IPS criteria flow directly into the trustee review materials you receive.
Memorializing the Process. Finally, fiduciaries should seek to get credit for their work – by showing their work. Preparing meeting minutes and other internal documentation is more of an art than a science. A good set of minutes memorializes the adherence to a process, highlights the trustees’ willingness to ask questions and to seek follow-up action from service providers, and paints a tidy picture of the diligence and prudence of the investment manager/advisor and trustees. But, for example, it need not attribute specific questions to specific individuals.
Closing Comments. Be wary of the following advice: “You don’t want your IPS to be too clear because then you’ll have risk when you don’t follow it.” Instead, seek this approach: “You want your IPS to be clear because we are confident in our processes, we have accepted the fiduciary responsibility to follow them, and good processes result in a better investment lineup for your employees.”
Matthew loves to write. He also loves to think, though he’s probably a better writer than a thinker. He does not like to be on camera or in videos. This blog will allow him to write, challenge his ability to think, and, from time to time, test him with video blog entries.
He has a unique blend of legal and practical experience that helps us to serve our clients well. On the one hand, he has more than 12 years of private legal practice experience focusing exclusively on employee benefits, including time as a partner in an employee benefits boutique where he has represented clients in front of the DOL and IRS. On the other hand, he holds his FINRA Series 7 and 66 registrations and serves as the Director of ERISA Services for Qualified Plan Advisors.
Matthew likes to stay active. He provides fiduciary training, Investment Policy Statement design, and vendor oversight to our clients. He is an active member of the Employee Benefits Committee of the American Bar Association Tax Section, serving as Chair of the Defined Contribution Plans Subcommittee. He also has been appointed to the IRS TE/GE Gulf States Council and is a frequent speaker on regulatory developments, fiduciary responsibilities, and retirement readiness.
Most importantly, he stays active with his family. His wife, Laura, is the founder of REbeL, Inc., a not-for-profit organization. His three young boys are mixed up in far too many sports, and they enjoy traveling, watching college football, running with Dad, and rooting for the Huskers.
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