Investment Policy Statements: What are they? Why do I need one?

If you are a retirement plan sponsor, you should already be familiar with an Investment Policy Statement (IPS). Of all the documents related to your company’s plan, it’s essential that the plan has—and follows—an IPS. In fact, it may be the first item that a Department of Labor audit will ask for. As plan sponsor, you personally have a fiduciary duty to plan participants, so it’s crucial you understand the components of an effective IPS.

Think of it this way: a new building begins with an architect and an engineer, who together draw blueprints for the builders to use in construction. Without blueprints, the builders won’t have a plan to follow to ensure that the resulting building is structurally sound. The IPS represents a plan’s blueprint—it assists both the Investment Committee and plan sponsor to effectively supervise, monitor and evaluate the management of the plan.

The IPS should:

• outline the methodology used to select funds for the participant menu;
• outline the duties and responsibilities of all parties involved in the plan (investment committee, custodians and investment advisors);
• identify responsible fiduciaries;
• define asset guidelines for the plan;
• identify benchmarks used to track performance for each investment option;
• determine the relevant indexes and peer groups identified for each fund;
• define the process used to monitor performance, and what happens when a fund fails to meet its benchmarks;
• identify and account for all parties receiving compensation related to the plan;
• be in written format, and reviewed annually (at a minimum) by the Investment Committee.

Sound like a lot? This is just a brief outline of some of the elements in an Investment Policy Statement. In my practice, I’ve met with many plan sponsors who were unaware of what an IPS is, and how it should work. In upcoming posts, I’ll further explain the components of an IPS, how to go about proper due diligence, and why it’s important to document that you’re following your own guidelines. In the meantime, if you’re concerned with how your plan stacks up, feel free to contact me for a free, comprehensive review.