Thursday, July 31, 2014

Investment Policy Statements

An investment policy statement (IPS) defines the processes that a company has adopted to make investment-related decisions with respect to the assets of a ERISA 403(b) and 401(k) plan. The IPS identifies the investment goals and objectives of the plan, establishes how decisions will be made regarding the selection of investments and specifies the procedures for measuring investment performance. While the law does not require that a plan adopt an IPS, it may be the single most important task that a fiduciary performs for the following reasons:

  1. An IPS documents that there is a defined process by which the ERISA 403(b) and 401(k) is being managed.
  2. It helps prevent fiduciaries from making unsteady investment decisions when markets are turbulent.
  3. It clearly identifies plan fiduciaries and helps them manage their responsibilities.
  4. An IPS defines roles and responsibilities of trustees, advisors, custodians and investment managers.
  5. It explains how to hire, monitor and replace investment managers when necessary.
  6. It provides evidence that a clear process and a methodology exist for selecting and monitoring plan investments. 
  7. It is a well-articulated, documented procedure for investment selection and ongoing investment evaluation, which are fiduciary obligations.
Get started on your IPS by gathering all of your plan documents (trust documents, summary plan descriptions, written minutes, current vendor service agreements, investment performance reports, enrollment reports, participant educational material, procedural manuals and Form 5500) and review them to determine whether:
  • the plan documents identify the trustees and named fiduciaries;
  • the plan is intended to be ERISA section 404(c)-compliant;
  • there is a clear understanding of the plan expenses and whether they are reasonable;
  • there is a formal process for making investment-related decisions;
  • there is a clear paper trail relative to the process being followed;
  • it is clear who has the authority to make investment decisions; and
  • the trust documents prohibit certain asset classes. 
After you have reviewed your plan documents, you are ready to write your IPS. While no single approach is appropriate for everyone, a typical IPS may cover the following:
  1. The Plan – General explanation of the purposes and goals of the IPS; acknowledges applicability of ERISA fiduciary standards and rules; addresses whether the plan is intended to be ERISA section 404(c)-compliant. 
  2. Purpose of the IPS – Identifies the objective of the investment policy statement and states the intention to review the policy quarterly, or at least annually, and to amend it as necessary.
  3. The Investment Objectives – Identifies the plan investment philosophy and the processes for the selection, monitoring and evaluation of plan investments. 
  4. Duties, Roles and Responsibilities – Generally defines the roles of the parties involved in the management of plan assets and administration of the plan. If there is an investment committee, the members are identified and their roles stated.
  5. Investment and Manager Selection – Identifies the policies and guidelines to be followed when selecting investments and managers. 
  6. Investment Monitoring and Reporting – Provides a process by which investment options are regularly reviewed and evaluated for continuing appropriateness.
  7. Investment Manager Monitoring and Termination – States how investment managers will be monitored and how often. Explains how underperforming managers will be evaluated and replaced if necessary. 
  8. Coordination with the Plan Document – Clarifies that in event of conflict between the IPS and the plan document, the plan document controls. 
  9. Controlling and Accounting for Investment Expenses – Defines the process by which expenses will be reviewed for reasonableness. 
It is not enough for you to simply write an IPS. You must also follow it, communicate it and review it. An ignored IPS is evidence that you are not managing or using the plan the way it was intended. Communicating the IPS is important for making sure everyone – participants, managers and service providers – is aware of what the plan involves and whether it is in compliance with the law. The needs and expectations of the plan and participants can change over time, which is why the IPS also needs to be reviewed and, if necessary, revised regularly.

With any plan document, your IPS should be reviewed by legal counsel prior to implementation. If you have any questions about this article, or would like to begin talking to a dedicated retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at sbs@hanys.org.