We recently posted a blog covering what you should include in your investment policy statement (IPS). In this follow up blog, we are sharing what you should not include in your IPS.
These blogs provide a lens through which to review your current policy statement for gaps and provisions that could cause you problems in the future.
Below are the items you should not include:
- Attached to Your Provider – The Investment Policy is a document of the committee, not the provider, and should be crafted in such a way to distinguish it as such.
- Return Targets – All committees are engaged in the work of selecting appropriate investments across a variety of asset classes. Laying out return targets is not useful and creates additional potential liability for the committee.
- Spell Out How Fees are Paid – Decisions about how much (if any) of the costs are paid by the sponsor is a settlor issue, inappropriate in a policy document for the committee. The decision about how other fees are allocated should be well documented in minutes, but should not be “fixed” within a policy document.
- Employee Names or Titles – Keeping policy documents up to speed to reflect changes in legislation is difficult enough. Policy documents should avoid naming people (or even titles) as they are subject to frequent change.
- List of Asset Classes Required for Inclusion – Unfortunately, investment products change asset class from time to time. Requiring the plan have a specific type of manager is out of your control, at least for short periods of time.
- Including Specific Numeric Measures the Committee will Review – No single investment metric is dominant to a variety of measures when evaluating investment performance. Requiring a review of a small number of quantitative metrics reduces the relative importance of qualitative factors, which are superior for evaluating appropriateness prospectively.
- Dictate Indexes for Comparison – The benchmarks a committee may use with respect to any investment vehicle may change as the benchmark industry changes or as the approach of the investment manager changes. Including named benchmarks leads to more required IPS amendments.
- Include Product Names in the Investment Policy – Product names change frequently, and amending the IPS for fund name changes is of little value.
- Require Funds be Removed for Quantitative Failures – In an effort to eliminate decision making for committees, some policy documents require funds to be removed after failing to achieve pre-determined benchmarks. Doing so may require the committee to take action when taking action may harm participants in the long term.
- Adopt Features that Conflict with the Plan Document or Trust Document – An IPS does not exist in a vacuum and should conform with all other governing documents for the plan.
- Include ESG because “Participants Like It” – Any ESG investment options should be subject to the same rigorous investment screening that would be used for other investment options.
- Commit to Reviewing Underlying Investments – Investment options in most SDB accounts range from good to terrible. Committees are not accountable for reviewing them individually. Committees may elect to review broad holdings data to determine whether current core investment options might be broadened to support more of the participant population.
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.