With the responsibility of prudently selecting the investments, monitoring those options, and removing or replacing investments when necessary – let’s discuss a way plan sponsors can document how they accomplish this—it’s called an Investment Policy Statement.
An Investment Policy Statement (IPS) is a written document with the purpose of providing meaningful direction and guidance for trustees and investment professionals regarding the selection and management of investment assets based on established and documented investment goals and objectives. When used properly, this document can limit liability, provide consistency, and set expectations for investment performance.
By preparing a written IPS, the fiduciary can: 1) avoid unnecessary differences of opinion and the resulting conflicts; 2) minimize the possibility of missteps due to lack of clear guidelines; 3) establish a reasoned basis for measuring their compliance; and 4) establish and communicate reasonable and clear expectations with participants, beneficiaries, and investors.
A recent survey found that while nearly 80% of plans over $1 billion had an IPS, only about 56% of plans with less than $25 million in assets had a policy statement. (Rogers/Casey Defined Contribution Survey)
Small plans have the same fiduciary responsibilities as larger ones and are just as vulnerable to employee lawsuits.
Almost 49% of sponsors say they rely on an employee or committee member to monitor IPS compliance. (Plan Sponsor Magazine Defined Contribution Survey)
The Investment Policy Statement serves as your documentation for managing your plan and limiting liability.
An IPS provides the plan sponsor with legal protection. It helps to demonstrate that sound, rigorous principles were followed to select and monitor the plan’s investments. A solid, workable investment policy statement is the best defense against investors that are prone to complaints or lawsuits and are willing to pursue illegitimate litigation to recover prudently invested assets.
While every plan has specific needs that dictate what goes into your formal IPS, listed below are some general topics that are defined in a typical IPS. There are many opinions as to what one should contain, how it should be structured, and how it should be written. The best way to make sure your IPS fulfills its intent to limit liability, is to structure one around your particular plan’s needs. As always, it is advisable to have an attorney review any IPS before it is used.
Plan Purpose
This section states the purpose of the Plan and of the Investment Policy Statement which usually includes “to assist the plan administrator and other plan fiduciaries in ensuring that the investment options under the plan:
- are selected and monitored in accordance with ERISA requirements;
- are consistent with the plan’s exclusive purpose of providing retirement benefits to plan participants and their beneficiaries; and
- satisfy the requirements of ERISA.”
The Investment Committee
This section generally defines how many people make up the committee, defines their responsibilities, and indicates how often they should meet. This section also defines the roles and responsibilities of fiduciaries outside of the investment committee. It is important that all fiduciaries understand what their responsibilities are and that they acknowledge them in writing.
Investment Options and Asset Class Guidelines
This section is extremely important as it details the criteria for selecting, monitoring, and replacing investments in the plan. The following key items must be considered and outlined in the Investment Policy Statement:
- What asset classes will be represented
- Selection criteria
- Monitoring criteria
- Performance expectations and benchmarks
- Types of investments to be held in the plan
A Solid Foundation™ will walk you through a strategy to educate you on the investment selection and monitoring guidance, evaluate your current process, formalize a policy for your company, and continue to monitor and use this document as it was intended.
