Creating an Effective Investment Policy Statement

Retirement plan sponsors aren’t required to have an Investment Policy Statement (IPS) for their plan. However, having a written statement in place can facilitate your organization’s plan meeting federal and state regulations and fulfilling the fiduciary duties of a plan sponsor and/or their committee. However, not all policy statements are created equal, and there are a few topics every IPS should cover. Learn about what should be included in an effective Investment Policy Statement and how a well-crafted IPS can lighten the load of a committee that’s tasked with difficult plan decisions.

An Investment Policy Statement (IPS) is a concise summary of a retirement plan’s goals, objectives, asset management structure, strategies, and restrictions. It provides investment committee members, the plan’s adviser, who are each serving as fiduciaries, and the investment managers utilized with a series of strategic policies that ensure that any decisions made or actions taken are in accordance with the overarching investment goals.

What to Include in an Effective Investment Policy Statement

Although an IPS can be as simple (or as complicated) as you’d like, there are a few key elements that every plan sponsor should include. Essentially, you’ll want the IPS to be a roadmap for success in operating the plan’s investment line-up, as well as serve as a guide to provide continuity as the investment committee composition changes. In other words, it assists new fiduciaries answer the question – “what would I need to know if I took over this plan tomorrow?”

Plan Goals

Every retirement plan should have their plan and investment goals documented. The goals of the plan can vary widely based on plan participant demographics to the amount of assets there are in a plan. These goals can include the use of index versus active solutions, whether to offer managed accounts or brokerage options, and how to manage fees for reasonableness and to cover plan expenses. Having specific investment parameters in place can assist the plan in performing as expected—and if it doesn’t, these parameters can empower the investment committee to take corrective action.

Roles of the Plan Committee & Adviser

Your IPS should include the name of your investment committee as well as any plan adviser who has responsibility for oversight of the policy. The amount of discretion given to the adviser determines the extent of their fiduciary responsibility, and needs to be defined. It’s also best practice for the IPS to include information on the adviser’s selection process, the duties and responsibilities it has, how frequently the plan committee will meet to review the investments chosen, and how (and how often) the committee will review the retirement plan service providers.

The Plan’s Investment Strategy and Criteria

Your IPS doesn’t need to delve into painstaking detail on the plan’s investment strategy and criteria, but should, at a minimum, outline some broad asset classes and identify the plan’s qualified default investment alternative (QDIA). The QDIA is the “default” option offered to plan participants who either don’t wish to make a selection or who don’t feel they have the knowledge to invest their contributions into a specific fund. (Often, a QDIA will be a target-date retirement fund or a fairly conservative, stable option like a money market fund.) An effective Investment Policy Statement also needs to elaborate on a process to manage fees for competitiveness and to cover plan expenses in a fairly level manner,

How the Plan Will Monitor and Amend Investment Selections

The investment committee needs to have clear parameters on how it will monitor investment selections and make changes when needed. Each year, for example, the S&P 500 adds and deletes around 23 individual stocks during its rebalancing process; this means that the composition of your plan’s investments will naturally change over time, even absent any changes on your end. Risk profiles of investments also vary widely. Risk measures need to be defined and monitored. By setting target ranges for your plan’s overall asset and risk allocations, you’ll be well-positioned to consider other options if they vary too far from these targets.

How the Plan Will Educate and Communicate with Participants

The last thing you want to do is invest significant time and effort into a comprehensive retirement plan, only to learn that employees are unaware of the plan’s benefits or even unaware that a plan exists. Setting forth standards for how you’ll educate plan participants and communicate changes in the plan’s options will ensure that participants are aware of their options and able to make good retirement plan choices.

Reviewing and Updating Your IPS

Designing a plan’s IPS from scratch is far more time-intensive than periodically updating it. But once an IPS has been established, it still needs to be revised and revisited on at least an annual basis. As part of this review, the IPS should include a step-by-step process on how the plan committee will evaluate investment options, monitor investments, substitute or eliminate funds, track fees, and assess whether a certain investment is meeting the benchmarks you’ve set.

Reviewing an IPS using these standards and steps can benefit your company in two ways. First, it will ensure that your investment committee is fulfilling its fiduciary duties and consistently acting in the plan participants’ best interests. And second, it can provide much-needed protection from liability in the event your plan is audited or litigated, or its management is challenged in the exercise of its fiduciary responsibilities.

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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