INVESTMENT SERVICES

It is well established that courts apply a “prudent expert” standard of care under ERISA, not a “prudent person” standard. In almost every case, the plan sponsor will benefit from the engagement of a fiduciary advisor to assist with the selection and monitoring of plan investments. The relevant standard is NOT what you might do in investing your own money; it’s what an expert would do in investing someone else’s money.

The selection, monitoring and maintenance of the plan investment menu are the duties most frequently identified with being an ERISA fiduciary. The investment policy statement (IPS) provides the framework for this process. The IPS defines the roles and responsibilities of the plan sponsor and its fiduciaries, outlines specific guidelines and restrictions, and provides for the periodic review of the investments and policies. The IPS defines the criteria for the evaluation, selection, ongoing monitoring, removal and replacement of funds.

Although not specifically required under ERISA, some courts have found that an IPS is the central guiding instrument and the foundation for a prudent fiduciary process. In the event of an audit, the IPS is at the very top of the list for requested plan documents. Some courts have gone as far as to question how fiduciaries can claim prudent plan management without an IPS.

Some advisors document and formalize the plan’s objectives and strategy through the creation of a written investment policy statement (IPS). The IPS should be reviewed, at a minimum, on an annual basis to ensure that the stated policy terms are followed, and modifications made as necessary.

Plan sponsors have a continuing duty to monitor plan investments. This duty is separate and distinct from the duty to exercise prudence in selecting plan investments at the outset. Continuous investment monitoring and quarterly reporting should be the standard. The plan sponsor should be able to demonstrate a clear and coherent investment management process that ties directly to the investment policy statement (IPS). Monitoring should tie to specific metrics in the policy, and every plan sponsor action should directly reference back to the IPS.

Plan sponsors should have a detailed and documented investment review process that ensures that they are meeting the obligations of the IPS. The advisor should evaluate the plan’s investments based on the criteria in the IPS, and plan reporting should include a broad range of quantitative and qualitative analytics – not just provide performance information. Some advisors employ in-depth monitoring tools to analyze and report the plan’s investments from a fiduciary perspective, reviewing such factors as manager changes, style drift, performance against peers and indexes, risk, and fees.

Ask the advisor for a sample copy of the reports the plan sponsor will receive. Do the reports illustrate performance against peers and indexes, risk, and fees? Are the reports easy to understand? How often will you receive reports?