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July 10, 2023 By Van Richards, ChFC Leave a Comment

An Investment Policy Statement: A Must-Have for Company Retirement Plans

An Investment Policy Statement: A Must-Have for Company Retirement Plans

Having a well-crafted Investment Policy Statement (IPS) is crucial when managing company retirement plans. An Investment Policy Statement (IPS) is an irreplaceable tool for making well-informed investment decisions that align with the goals and values of the plan. In spite of an IPS not being legally required, an IPS is considered a best practice and offers several benefits for plan sponsors and fiduciaries.

The Role of an Investment Policy Statement

An IPS provides a framework for retirement plan fiduciaries to make investment decisions and document their process. Regardless if the retirement plan is a newer PEP, traditional 401k, or even a traditional pension, an investment policy statement is a must-have. It outlines the roles and responsibilities of the parties involved in the plan’s investment process, including the plan sponsor, investment committee, and investment advisor. By clearly defining these roles, an IPS helps promote consistent decision-making and protects against fiduciary liability concerns.

Why Establish an Investment Policy Statement?

  • Compliance with Department of Labor Guidelines

The Department of Labor (DOL) supports the establishment of an IPS as part of fiduciary oversight. While not a legal requirement, having an IPS demonstrates adherence to ERISA’s duty of prudence. The Department of Labor stresses the significance of having an IPS and highlights that it aligns with the plan’s objectives and demonstrates adherence to fiduciary responsibilities regarding funding policy.

  • Enhancing Fiduciary Compliance

Maintaining an IPS is considered a “best practice” and can help protect plan sponsors and fiduciaries from potential complaints and alleged violations. By following a documented process outlined in the IPS, fiduciaries can demonstrate that they have acted prudently in selecting and monitoring plan investments.

  • Consistent Decision-Making

An investment policy statement promotes consistent decision-making by providing criteria for selecting and monitoring plan investments. It outlines the plan’s investment goals, objectives, and philosophies, ensuring that decisions align with these principles. A well-thought-out IPS can guide investment decisions and improve plan participants’ outcomes.

  • Documentation and Institutional Memory

An IPS serves as a documented roadmap for the ongoing monitoring of plan investments. It clearly records the plan’s investment objectives, strategies, and processes. It’s helpful to have a system to keep track of past decisions and make sure retirement plans stay consistent when there are changes in company management.

Critical Elements of an Investment Policy Statement

To be effective, an IPS should include several key elements that provide a comprehensive framework for decision-making. These elements include:

  • Statement of Purpose & Summary

The IPS should clearly state its purpose, who it is for, and the goals it aims to achieve. A summary of the plan’s goals and objectives helps paint the “big picture” before diving into the details.

  • Goals & Philosophies

The IPS must outline the plan’s goals and investment philosophies. Coherent goals serve as a guiding force for decision-making, ensuring that investments align with the plan’s objectives. The investment philosophy should detail the plan’s approach to diversification, risk management, and reasonable costs.

  • Roles and Responsibilities

Clearly defining the roles and responsibilities of plan fiduciaries and service providers is essential. Instead of naming specific individuals or organizations, the IPS should describe functions and responsibilities to accommodate changes without constant updates. It should also include guidelines for monitoring vendors regularly.

  • Investment Choices

The IPS should guide the investments that align with the plan’s goals and philosophies. While avoiding excessive detail, the IPS should outline the range and type of allowable investment strategies. It should also address the use of employer securities, if available.

  • Investment Evaluation Criteria

An IPS should establish criteria for selecting and evaluating plan investments. Making careful decisions can lessen the probability that employees will complain that the company is not living up to its fiduciary duty. Regrettably, complaints come in the form of lawsuits. In contrast, IPS can’t prevent litigation. It can lessen the possibility. It should outline procedures for initial investment selection, regular monitoring, and termination of underperforming options.

Making Changes

Flexibility is essential, as market conditions and circumstances may require adjustments to the plan’s investments. The IPS should include clear procedures for making modifications and enhancements. It is important to regularly review the IPS to ensure it still fits and is being followed correctly.

Conclusion

In conclusion, an Investment Policy Statement is vital for managing company retirement plans. While not legally required, it offers numerous benefits, including compliance with Department of Labor guidelines, enhanced fiduciary compliance, consistent decision-making, and documentation of investment processes. By including key elements such as a statement of purpose, goals, roles, and responsibilities, investment choices, evaluation criteria, and procedures for making changes, an IPS provides a clear roadmap for successful plan management. Consider developing an IPS to ensure your retirement plan’s investments are strategic, well-aligned, and give the best outcomes for plan participants.

If you’re seeking personalized guidance on your company’s investment policy, schedule a call with Van Richards, ChFC. Simply click below to set up a brief call.

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Filed Under: Business Planning, Retirement Planning Tagged With: 401k, retirement, retirement planning

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