Although ERISA doesn’t specifically require retirement plan sponsors to create and adhere to a written Investment Policy Statement, having an outlined statement in place can allow sponsors to efficiently run a plan consistent with ERISA requirements while fulfilling their fiduciary duties. An Investment Policy Statement will be unique for each organization based on the characteristics of the plan, but we have compiled a list of considerations for developing a well-crafted document.
What Is an Investment Policy Statement?
An Investment Policy Statement (IPS) is a document in which the plan sponsor (often with the assistance from their plan consultant) sets forth the plan’s objectives, investment goals, strategies, restrictions, and the general structure for managing the plan’s assets. It serves as a guideline for trustees, investment managers, committee members and fiduciaries that make plan-related decisions.
An IPS can be as detailed or streamlined as the sponsor wishes, although there are a few reasons to shy away from an ultra-barebone IPS. Overall, an IPS can be an invaluable tool for:
- helping plan sponsors and the committee keep their investment goals in mind,
- outlining portfolio construction and ongoing management,
- promoting consistent decision-making regardless of members changing within the investment committee, and
- providing an objective framework by which the plan can be evaluated.
Factors to Consider When Developing an IPS
As an IPS is not required by ERISA, there is no official set of standards that specify what should be included. However, every IPS should start with the basics: the “who,” “what,” and “why” of the sponsor’s qualified retirement plan. This includes a summary of the plan (e.g. plan name, type, etc.) and its goals, in addition to identifying the retirement plan or investment committee and their roles in selecting, monitoring or changing investments. The IPS should clarify the plan sponsor’s and investment committee’s responsibilities with regard to the plan’s assets.
Furthermore, a good IPS will also include information on:
Plan and Investment Objectives
The central basis for creating an IPS revolves around the plan and investment objectives. When drafting investment objectives, keep in mind that this document will serve as a guide for future committee members and advisers. Sponsors need to clearly state specific objectives, and include any information you deem necessary or relevant to ensure that these objectives can be viewed as a guide for future investment decisions. Ask yourself, “what would I want to know about the plan’s investment goals if I were stepping into this role today?”
Investment Structure and Selection
The IPS should provide specific investment criteria such as the targeted number and types of investment options offered within the plan, as well as what the qualified default investment alternative (QDIA) will be. It’s a good idea to review the QDIA annually (and to spell this out in the IPS) to ensure that the current selection is still the most appropriate default option for the average plan participant.
Similarly, there should be details concerning investment selection that will guide fiduciaries and plan administrators on how to choose individual investment options or an investment management firm. Be sure to define any terms that might be subject to more than one interpretation. For example, instead of using a broad statement like “expense ratios should be reasonable,” consider defining the maximum expense ratio the plan is willing to accept. It’s important to be specific so that everyone is applying the same terms and metrics.
Investment Monitoring and Evaluation
It is equally important to provide a well-defined process for evaluating investment options, including the frequency of evaluation and the necessary steps to eliminate or substitute a fund. Some of the questions you’ll want to address in this section include:
- How will investments be monitored, and by whom?
- What standards will be employed to decide when a certain investment or asset class is underperforming?
- How long should a fund be monitored before action is taken (e.g. watch list, freezing from receiving contributions, replacement)?
- How will fees be monitored, and by whom?
Detailing this process not only ensures that a method is in place for all to follow, but it is considerably helpful upon an audit or lawsuit.
Adviser and Investment Committee Members
In addition to listing the names of plan advisers, retirement plan or investment committee members, and any others of note, a well-drafted IPS will include detailed information on how these advisers and committee members are selected, what each role is responsible for, and how members screen for, assess and document potential conflicts of interest. Frequency of committee meetings and reviewing the plan’s service providers should also be included.
Participant Education and Communication Plan
Even the best investment plan won’t provide many benefits if participants aren’t educated on their options. Plan sponsors should determine the nature and frequency they will educate plan participants, as well as what “on-boarding” education new participants will receive.
Conclusion
If implemented and followed properly, a well-written IPS provides stability and consistency in a rapidly-evolving investment environment. It can be an important factor when deciding how the plan will be managed. An IPS is one of the most efficient ways to give investment decision-makers a blueprint and help ensure that they adhere to their fiduciary obligations.
Conversely, an IPS shouldn’t be adopted lightly or as a means to check off ERISA-related boxes. Creating an IPS does not relieve plan fiduciaries of liability. In fact, an ERISA violation is more likely to be imposed against a plan sponsor that has an IPS but doesn’t comply with its provisions than a plan that doesn’t have one in place.
Before your organization adopts an IPS, it’s important to keep in mind that the IPS is only one factor of properly managing your plan and its assets. It is crucial to ensure that the document is always up-to-date, and the plan is operated according to the terms stated. While many plan sponsors may claim to understand investing, it is greatly beneficial to turn to a professional consultant. Your consultant should candidly provide guidance on plan and investment options, and governance.
PlanPILOT Can Help
PlanPILOT is an independent registered investment advisor (RIA), not tied to any funds or investment banks. We help clients control their risks in operating retirement plans and help them deliver the benefits intended. We also review fund lineups and score investments, highlighting any recommended changes. Read our informative whitepaper on Developing Investment Policy and Structure that could be beneficial if you are considering modifying your investment options. Feel free to contact us if you would like to learn how PlanPILOT can help you.
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