Standard Items Appearing In An Investment Policy Statement

A retirement plan’s overarching goals are to help participants accumulate wealth during their years of employment and to provide them with income during their retirement.

The challenge for fiduciaries is to successfully navigate the options available and build an optimal investment menu that is designed to guide participant choices and improve their retirement readiness. Since plan fiduciaries may be exposed to personal liability, it is prudent to have a process in place for the selection and monitoring of investment options.

Plan fiduciaries should have an established framework on which they can defend their investment decisions should they ever be challenged. The process should begin with the construction of the plan’s Investment Policy Statement (IPS). Although not required by the Employee Retirement Income Security Act (ERISA), drafting an IPS is a fiduciary best practice. The IPS serves as a policy guide that can offer an objective course of action to be followed when emotional or instinctive responses might otherwise motivate less prudent action.

Standard Items Appearing In An Investment Policy Statement:

• Identification of the retirement plan name, participants, and fiduciaries
• A statement of purpose for the IPS
• For fiduciary-directed investment portfolios, a statement of asset allocation policy and rebalancing guidelines
• A description of the process and/or criteria to be used in choosing and monitoring the plan’s investments, including TDFs
• Listing of approved asset classes, with a relevant industry benchmark index for each
• Identification of the replacement process or “watch list” for managers who no longer meet the selection/retention criteria
• Listing of restricted investments, at the fiduciaries discretion (e.g., tobacco, alcohol, firearms, or gambling)
• Statement of frequency of investment performance reviews, and general communications procedures for service providers
• Identification of the service providers with roles, responsibilities, and deliverables to fiduciaries (e.g., the plan advisor, record keeper, administrator, custodian, directed trustee, and actuary)
• Listing of investment manager search, selection, and retention criteria identifying the process by which the plan’s Qualified Default Investment Alternative (QDIA) will be chosen

The IPS should be written to allow fiduciaries latitude to use their best judgement based upon a given set of circumstances. Rigid investment policies that are not followed could be used against fiduciaries in a court of law. It is a fiduciary best practice to review a plan’s IPS at least once every two years or pursuant to significant regulatory changes.

To learn more about the other key steps, read 4 Steps to Building an Optimal Retirement Plan Lineup for Participants. If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by email or by calling (855) 882-9177.