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The Investment Policy Statement: A must-have for plan sponsors

Having an investment policy statement (IPS) in place can help you more efficiently run your plan consistent with ERISA requirements.

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.

An IPS is a document created by plan sponsors (and oftentimes with assistance from their financial professional or plan consultant) 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.

The purpose of the IPS is to provide the fiduciaries with guidance in discharging certain fiduciary responsibilities – and may even help mitigate risk in some circumstances. The IPS can also serve to fulfill certain ERISA requirements concerning investment 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.

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:

  1. Plan description and objectives: This section can be viewed as a plan overview or executive summary of the IPS. It 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).
  2. Investment structure and selection criteria: This is the section of the IPS that spells out in detail all matters concerning investment selection including the number and types of investment options available in the plan. The selection criteria 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.
  3. Ongoing monitoring and evaluation processes: This section focuses on the ongoing monitoring of investments and portfolio managers. Issues such as oversight committee meeting frequency and purpose, periodic realignment of plan holdings, style drift, investment performance assessment, and substitution policies can all be addressed here. The nature and frequency of participant communications should also be included in this section.

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 email bulletin boards are commonly used tools to help gauge employee sentiment. And, before drafting your IPS, you'll want to consult qualified legal counsel.

The bottom line: Having an IPS in place can help you more efficiently run the plan consistent with ERISA requirements.

The information in this communication is not intended to be authoritative guidance or legal or tax advice and should not be treated as such. Each individual's situation is different. You should contact your legal and/or tax professionals to discuss your personal situation.

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