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The Investment Policy Statement -- A Firm Foundation for Monitoring and Control

As a retirement plan sponsor, you face a number of questions when deciding how your plan will be managed. What types of investment options will you offer in the plan? What are the long-term funding goals? What are the short-term liquidity needs? How will you evaluate funds and managers on an ongoing basis? To answer these and other questions, many plan sponsors create an investment policy statement (IPS), a document that defines investment policy and procedures and often serves as a road map for your plan.

What Exactly Is an Investment Policy Statement? 

It's a document created by plan sponsors that provides written guidelines for trustees, fiduciaries, and investment managers who make important decisions about the plan. Defining specific parameters for funding objectives, investment selection, risk management, and evaluation procedures, the statement gives employers the tools they need to adequately manage the plan. It also helps define goals and outlines the benchmarks with which to compare investment results.

Why Have an Investment Policy Statement? 

The purpose of the IPS is to provide fiduciaries with guidance in discharging certain fiduciary responsibilities -- and may even help protect them in some circumstances. The IPS can also serve to fulfill certain Employee Retirement Income Security Act (ERISA) requirements concerning fund selection, participant investment discretion, and participant communications. Above all, the investment policy statement is critical to establishing broad investment goals and funding requirements, as well as defining exactly how plan funds will be administered.

What Should Be Included in an Investment Policy Statement? 

While there is no official set of standards specifying exactly what is included in an IPS or how it is organized, typical statements usually contain three fundamental areas: plan description and objectives; investment structure and selection criteria/process; and ongoing monitoring and evaluation processes.

Plan description and objectives: This can be viewed as a plan overview or executive summary of the IPS. This section generally contains such information as the overall plan purpose or objectives, summary plan information (plan name, type, participant eligibility, plan fiscal year, etc.); a summary of plan options available to employees; and a summary of the investment selection process. It may also identify the plan's board or oversight committee and the role of this committee in choosing/monitoring or changing investments (although this can be detailed elsewhere in the document). This section also typically includes a statement of the plan's intention to meet ERISA requirements. Investment structure and selection criteria is the section of the IPS that spells out in detail all matters concerning investment selection including:

Investment structure and selection criteria/process: This section defines the number and types of investment options available in the plan, and outlines the process and criteria for selecting investment options.

  • Investment structure: Will there be a core group of funds? Will the plan feature lifestyle or risk-level portfolios? Will plan investment options be tiered among different employees? Will the plan feature an asset allocation approach? Will it contain a brokerage fund option? Will it feature company stock? How often will plan participants be permitted to change their plan holdings and what restrictions will apply?
  • Selection criteria: This section should give working guidelines to fiduciaries or plan administrators as to how to choose an investment management firm or individual investments for the plan. For example, what specific criteria should be taken into consideration (fund performance, management tenure, fees, maximum allowable position, and a host of other information) when choosing a fund? Or, what factors should be considered when gauging the suitability of a particular management firm?
  • Selection process: This section identifies the plan oversight committee and its role in selecting/approving investments. Items such as meeting frequency and approval levels should also be addressed here.

Keep in mind that the more specific the information and guidelines in each section are, the more accurate a guide the IPS will be for present and future fiduciaries.

Ongoing monitoring and evaluation. This section focuses on the ongoing monitoring of funds and fund managers. Issues such as oversight committee meeting frequency and purpose, periodic realignment of plan holdings, style drift, fund performance assessment, and substitution policies can all be addressed here.

The nature and frequency of participant communications should also be included in this section. Should there be a regular plan newsletter? How will plan changes be communicated? How often are plan statements sent out? Do you wish to provide online access to employees? These are all questions that you should consider here.

Other Considerations 

When making the many decisions that are required to put together an IPS, always keep in mind employee needs and preferences, since they are ultimately what will drive plan participation levels. Periodic employee surveys or e-mail bulletin boards are commonly used tools to help gauge employee sentiment. And, before drafting your IPS, you'll want to consult qualified legal counsel. You may also wish to review ERISA regulations. ERISA, along with the Internal Revenue Code, sets the legal framework within which all employer sponsored retirement plans must operate. ERISA section 404(c) sets forth guidelines for plan sponsors and others regarding educating employees about plans and disclosing plan and investment information.


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