The investment policy statement (IPS) operates as a written statement intended to provide a plan’s investment fiduciaries with a framework for decision making regarding various types or categories of plan investments. Typically, an IPS outlines the roles of the parties involved with the plan investment process and details their investment responsibilities. As a retirement plan sponsor, you’re likely already aware that an IPS should be customized to meet the specific needs of your company’s unique plan.
That doesn’t mean the IPS is a set-it-and-forget-it type of document, however, as it should be reviewed annually as part of the committee meeting process. That’s because things like changes in the economy or your plan demographics may require the IPS to be adjusted to satisfy any changing plan needs. Once the IPS is in place, the annual review also provides an important opportunity for the committee to ensure they’re actually executing the IPS accordingly.
Why You Should Establish and Maintain an IPS
Although retirement plans are not required to have an IPS to be ERISA-compliant, it’s generally considered a best practice to have one, and the Department of Labor (DOL) favors them. The DOL views an IPS as serving a “legitimate purpose” in helping to ensure a plan’s investments are structured to promote its purposes and funding.
By setting forth criteria involved in the selection and monitoring of plan investments and time periods for assessing investment performance, an IPS can promote consistent plan decision making in alignment with the plan’s objectives. In addition, establishing the selection and monitoring criteria also helps to demonstrate the existence of prudent fiduciary processes.
Investment policy statements have also become practically ubiquitous. Since most employer-sponsored retirement plans maintain an IPS, not having one can be seen as operating “outside the lines” and may subject the plan’s fiduciary compliance to greater scrutiny.
What Your Investment Policy Statement Should Include
Since there is no legal mandate for an IPS, how they are made is entirely up to the plan sponsors. There are certain elements, though, that every IPS needs if it is going to be complete and effective. To take full advantage of an IPS, you should make sure it includes:
1. Roles and Responsibilities
It needs to be obvious who is in charge of the different aspects of plan management and decision-making. Although specific people should not be named to avoid needing alterations whenever someone’s role changes, the IPS should identify and outline plan sponsor and/or investment committee responsibilities. Guidelines for monitoring the vendors on a regular basis should also be included.
2. Goals and Philosophies
An IPS must clearly lay out the plan’s goals so that you have a standard by which to measure future success. Coherent goals set the direction toward which all decisions need to point. You will know you are making the right decision if it moves your plan closer to its stated goals. The investment philosophy also needs to be spelled out in detail. This should include things such as offering a wide range of investment options in various asset classes to allow for diversification and cover a wide range of risk and return profiles or reasonable costs to the plan and participants.
3. Compliance with ERISA
Again, an IPS is not required to be ERISA-compliant. However, it can be extremely beneficial to save space in your IPS to define the intention to comply with ERISA Section 404(c). This should also address the rules regarding qualified default investment alternatives (QDIAs) included as part of your plan.
4. Investment Choices
Describe the structure of the investment option menu but be careful to toe the line between being overly detailed and too vague. Too much detail, such as listing specific funds or investment managers, is inflexible and will force you to rewrite the document with every change you make. However, it needs to be specific enough to provide guidance, so the range and type of investment strategies that are allowable would be more appropriate to include. It should also address the use of employer securities, if available.
5. Investment Evaluation Criteria
It is important to define the investment evaluation criteria. Having this pre-established can help protect against accusations of breach of fiduciary duty. Not only should it describe how to pick initial investments, but it should also provide guidelines for the selection, replacement and monitoring of investments and have explicit procedures in place for terminating underperforming investment options.
6. Regular Reviews and Making Changes
No matter how well you plan, things will likely need to be changed and adjusted along the way, and it’s important to prepare for them in the IPS. It should include clear procedures for making modifications and enhancements. There should also be procedures in place to review the IPS regularly to ensure that it is still suitable and being properly followed.
How We Can Help
A good investment policy statement provides a clear road map that makes investment-related decisions for the plan faster and easier. Which is why, if you don’t have an investment policy statement in place, you should consider developing one. Putting an IPS in place doesn’t have to be very time-consuming and inconvenient, though. When you partner with an experienced specialist, you can save yourself a lot of time and get all of your questions answered.
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
CPFA, AIF®, QKA Brian leads a highly qualified team and oversees the retirement plan governance and fiduciary responsibilities for his clients, along with their administration, operations and design. He has more than 20 years of broad experience working in retirement solutions, including managing plans for large, multi-hundred-million-dollar corporations as well as small businesses. Brian supports his clients by designing customized retirement plans that are focused on specific goals and...Read More