The investment policy statement tightrope

Editorial Note: This post originally appeared on our companion blog, Fiduciary Matters, on July 27, 2016.


Last week, my colleague Michael Thomas discussed investment strategy for investment committees like those used by many plan sponsors. Part of the foundation to any such investment strategy is a well-crafted investment policy statement. It can be one of your most effective governance tools.

Many sponsors are also finding, with the intensified litigation risk surrounding defined contribution (DC) plans, that investment policy statements are becoming an increasingly charged topic.  Indeed, an investment policy statement could hinder your ability to oversee your investment program and, at the extreme, land you in court.

Litigation risk is real

Take the recent example of Charles E White et al v. Chevron® Corporation et al.   This case involves multiple aspects, one of which revolves around the use of a money market mutual fund in Chevron’s DC plan.

The plaintiffs claimed, among other things, that the investment policy statement also required the fiduciaries to “seek maximum current income… consistent with preservation of capital and liquidity.”  It was argued that stable value funds meet these requirements, whereas money market mutual funds do not because they provide a minimal return and no guaranteed interest rate.

To be clear, many plan sponsors use money market funds and these are generally viewed as acceptable options in DC plans.  However, the issue highlighted in litigation like this surrounds the specific language used in investment policy statements and the potential risk that may exist if it can be argued that actions are not consistent with such language.

Trade-off between prudence and risk

There is a fine balance between the general intent of an investment policy statement to demonstrate procedural prudence vs. the risk associated with any prescriptive language embedded in such documentation.  It is not unreasonable to expect that fiduciaries would want to avoid the latter. But does that mean throwing out the baby with the bath water?

Investment policy statements are important in providing meaningful guidance to fiduciaries, but this guidance could take the form of a more principle-based approach—leaving actual decisions to judgment—rather than imposing directives.

Steps that fiduciaries could take to provide more comfort

  1. Review investment policy statements to identify any prescriptive language
  2. Reaffirm comfort with such language, or otherwise add flexibility where deemed necessary
  3. Establish a process for periodic review, including with ERISA Counsel.
  4. Consult with an experienced third-party on guidance specific to your potential plan needs.

Finally, there is no substitute for ensuring you will do what you say.  The bottom line is that it is simply not a good idea to put things in writing if you are unwilling, unlikely, or unable to deliver on them.