I. Overview
A written investment policy statement (IPS) provides guidelines and directions for the conscientious fiduciary. The Employee Retirement Income Security Act (ERISA) does not include a specific requirement that plans have a written IPS. The concept of a documented IPS comes from the fiduciary duty of prudence established under both ERISA and the common law of trusts. It is also referenced in interpretive bulletins issued by the Department of Labor (DOL). A copy of a plan’s IPS is usually requested as part of DOL plan audits.
II. Is an IPS Required?
Although ERISA does not require a written IPS, the law does require that trustees establish and follow prudent process in caring for assets. An IPS goes a long way toward doing that. Complying with the investment policy’s requirements allows the fiduciary to demonstrate prudence. Obviously, it is wise for the ERISA fiduciary to adopt a written IPS, but then it must be followed.
III. What Should be in an IPS?
Essentially, all practitioners agree that an IPS is vital, but not all agree on how it should be crafted. Many practitioners recommend that an IPS contain only the standards that will enable plan fiduciaries to establish prudence and compliance with ERISA requirements, while leaving more rigorous standards and processes to be implemented more informally. The IPS should be used to outline the purpose of the plan and lay out investment responsibilities. It should establish the investment objectives, justification for those objectives, and standards for meeting those objectives. It should also establish the options for the plan, justification for those options, and a process for monitoring the performance of investments and service providers. A properly drafted IPS provides the plan sponsor and fiduciaries with a guidebook for the suitable investment of plan assets. A sample outline is attached.
Once asset allocations and guidelines are set, investment committees must set up methods to measure the performance of the investment lineup, the portfolio managers, and the investment advisor. The committee should have a process in place to quickly identify and resolve issues. Ideally, the IPS should be revisited at least annually. New board members and personnel can acquaint themselves with the objectives of the investments, facilitating the coordination of all parties to execute the goals of the plan. Additionally, as changes in the goals and objectives of the investments occur, revisions can be made.
IV. Summary
Once written, the IPS should be a vital document under which the plan is maintained and thus must be followed. A failure to follow could be viewed as a clear example of a fiduciary’s imprudence and a violation of ERISA. An IPS is only as good as the fiduciary’s execution and can be used by plaintiffs in validating a breach of fiduciary responsibility. It should therefore be carefully drafted.
V. Sample Outline
A comprehensive IPS does not need to be unnecessarily complex and lengthy, but it should at least include the following sections[1]:
A. Plan Objectives
- Describe the purpose and general investment objectives of the plan.
- Identify and allocate responsibilities among the fiduciaries and other parties responsible for selecting, monitoring, and managing plan investments.
B. Investment Strategy
- Describe the asset classes of investment options to be offered and specific factors and criteria for selecting investment options, such as risk and return characteristics, expenses, and benchmark comparisons.
C. Participant Direction
- If the plan permits participants to direct investments and intends to comply with Section 404(c):
- State that the plan intends to comply.
- Describe the methods and criteria for selecting options, including fees, and for monitoring and replacing funds, if necessary.
- Describe investment education and other information offered to participants in connection with investment options.
- Describe any restrictions on particular options.
- Describe the process and standards for selecting a qualified default investment arrangement.
D. Monitoring
- Describe standards for investment performance and criteria for measuring performance.
- Describe the methods and criteria for selecting, monitoring, and if necessary, replacing plan investment service providers.
- Describe how often investment performance will be reviewed and the review process (including the use of outside investment consultants).
E. Expenses
- Describe standards for accounting for and managing investment expenses.
