While industry practice has generally held that an investment policy statement (IPS) is considered a best practice for plan fiduciaries, there is a sentiment among some in the retirement plan industry that an IPS is not appropriate. This sentiment believes that an IPS provides documentation that can be used against the plan fiduciary in litigation if the plan’s fiduciaries fail to follow the IPS as it is written.
Keep in mind that the Employee Retirement Income Security Act (ERISA) does not require that plan fiduciaries adopt an IPS. However, when properly drafted and followed, an IPS can be a valuable tool to assist plan fiduciaries in managing and mitigating investment-related risk. By outlining the process that a plan’s fiduciaries will follow, the IPS will allow the plan’s fiduciaries to follow a consistent process over time that will streamline decision-making. The key, however, is a properly-drafted IPS that avoids the pitfalls which may lead to litigation traps.
Below are what you SHOULD include in your IPS:
- Stated Purpose – Stating the purpose of the policy helps future committee members better understand the document within the context of their new responsibilities as a fiduciary.
- Investment Objectives – In most defined contribution plans, the decision about asset allocation is left to participants. How the committee makes determinations about asset types, classes, and individual investments should be spelled out.
- Fee Policy – Litigation surrounding plan fees continues. To the extent the plan has a policy on share classes in retirement plans, that information should be articulated in the policy.
- Roles and Responsibilities – Managing a defined contribution plan requires a village from committees, to advisers, to asset managers and beyond. The policy should articulate the responsibilities of these parties with regard to the plan.
- Selection of Investment Managers – Based on the investment objectives above, how does the committee go about the process of narrowing the broad investment universe?
- Investment Monitoring – What process will the committee use to determine whether investment managers continue to meet the needs of the plan and its participants?
- Investment Manager Termination – What would cause the committee to replace an investment manager?
- Default Investment Alternative – For most plans, the fastest-growing investment alternative(s) are the default alternatives. This is an instance when the plan is selecting an investment product(s) for participants. The criteria for selection and monitoring should be clear.
- Committee Discretion – The defined contribution IPS is a document of process and philosophy, not of the outcome, so the policy should clearly articulate the discretion of the fiduciaries charged with making decisions about the approach.
- Plan Document Coordination – The IPS is a document of the plan, but should subordinate to the plan document.
- Environmental, Social, and Governance (ESG) Investments – The Department of Labor has provided significant guidance on selection criteria for ESG investments, and plans that incorporate them should speak to those requirements within the policy.
- Self-Directed Brokerage (SDB) Account – Some plans allow participants to purchase additional securities through brokerage accounts within the plan. The process of selecting the brokerage providers should be addressed if your plan allows for such a process.
Be on the look out for our blog focused on what you should not have in your IPS in the coming weeks. 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.