Investment Policy Statement Basics

There are many factors with which employers, plan sponsors and plan administrators must contend that are having immediate and profound effects on retirement plans. But even amidst such maelstroms, it can be useful to keep in mind some of the structural aspects of a plan that set its tone and keep it functioning smoothly and effectively.

In “Investment Policy Statement: Elements of a Clearly Defined IPS for Defined Contribution Plans,” a recent entry on Russell Investments blog, the authors discuss the key elements of an investment policy statement and how a well-crafted one can be of fundamental importance in the success of a defined contribution plan.

“Today’s increasingly complex investment and regulatory landscape places greater pressure on the plan sponsors and fiduciaries overseeing defined contributions plans,” they write, adding that fiduciaries are examining not only investments and investment practices, but also seeking flexibility. And, they argue, “Central to the idea of a well-managed program, a clearly articulated investment policy statement (IPS) serves as the foundation of sound governance and a robust oversight process.”

An IPS, a document specific to a particular plan, provides procedures for that oversight. It is not mandated by law, the writers note, but they suggest that the DOL wants it both ways. They caution that if a plan is audited by the Department of Labor (DOL), an IPS is one of the first documents they will request.

Further, they cite DOL Interpretive Bulletin 29 CFP 2509.94-2, which discusses the importance of an IPS in fulfilling fiduciary obligations:

For purposes of this document, the term “statement of investment policy” means a written statement that provides fiduciaries who are responsible for plan investments with guidelines or general instructions.

The failure of ERISA to require an IPS “doesn’t mean it is not needed,” the writers argue.

The writers suggest that an IPS should provide: 

• plan objectives;
• investment structure;
• guidelines for evaluation of investments; and
• responsibilities of all relevant parties.

They call the following “core areas” that the sections of an IPS address:

• Purpose and Scope
• Plan Objectives
• Definition of Duties
• Investment Menu Framework
• Monitoring and Evaluation
• Participant Communications
• Acknowledgements

Putting an IPS together, the writers say, “should be a dynamic process.” When it is originally composed, they suggest, input from investment advisors and external counsel can be helpful in identifying additional matters it should address. The IPS development process “can be like walking a tightrope,” they say, elaborating that plan fiduciaries “must strike a balance” between creating a document that is prudent and one that does not require fiduciaries “to act in any particular way.” The end result of preparing an IPS, they write, should be a document that all relevant parties can easily understand and execute and is clear concerning investment strategy.

After the initial composition of the IPS, the writers advocate infrequent changes but annual review of the document. At the same time, however, the authors advocate flexibility to better enable the plan to meet economic, regulatory and accounting developments in the future.

“Having a well-defined and clearly articulated IPS is vital in today’s challenging investment and regulatory landscape,” say the writers, and that document “fulfills a vital role” in building the foundation of a plan’s governance and in ensuring that fiduciary duties are fulfilled.