We previously covered categories of content that are important to incorporate into a best practice Investment Policy Statement (IPS). In this blog, we will be reviewing a checklist of items to think about when structuring an adequate IPS.
The following are best practices to consider:
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- IPS should be drafted and adopted by the committee prior to the selection, monitoring and replacement of investment options; IPS should be executed by those monitoring the investments
- IPS should incorporate plan- and participant-specific needs and/or
references
Example: ESG investment monitoring criteria
- Objective criteria is characterized by the following: unambiguous, measurable, specified in advance, appropriate for the investment options
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- The purpose of identifying roles and responsibilities in the IPS is to assist all parties in understanding their role as it relates to the investments, but ultimately the contract between the plan and each service provider prevails
The committee should try to limit overlap between service providers to the plan
Example: Investment advice to the committee should not be provided by both the recordkeeper and investment advisor
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Using absolute and/or restrictive provisions can obligate the committee to items they may not be able to meet
Example: Data points that are too costly to obtain
Example: Criteria that requires a fund to be removed after a specified number of quarters on watch list
Use relative criteria as an alternative to specific quantitative criteria
Examples: expenses, style, risk |
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- Fund changes may be initiated by the committee or by the investment management firm
- When specific funds are listed in the IPS, fund changes create the risk that the plan’s operations do not align with the IPS
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- Qualitative decision-making is a forward-looking assessment of an investment management firm’s people, process, and philosophy
- Example: Is it a well-defined philosophy and process?
- Example: What is the firm’s people management strategy?
- Committees should ask questions regarding how investment management firm qualitative due diligence is conducted and communicated
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- The IPS is a living document, and the IPS should be updated as-needed
- Example: changes to investment menu tier structure
- The IPS should also be updated as regulations are changed
- Example: DOL regulations on ESG
- As other governance and plan documents change, the IPS may also require updates
- As a best practice, the IPS should be reviewed periodically to ensure that actual practices for the selection and monitoring of the investments align to the IPS
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To download a PDF of our full IPS Review Guide with the material you should and should not include in your IPS, click here.
For a full picture of creating and maintaining a best practice IPS, read our Guide to Creating and Maintaining your IPS.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.
