Are You Mastering Your Company’s Investment Policy Statement?

Committee members meeting For investment Committee members of employee-directed retirement plans, such as 401(k)s or 403(b)s, crafting and monitoring your Investment Policy Statement (IPS) is essential to maintaining your fiduciary responsibilities. Continued yearly education is important for Committee members to stay on top of the necessary practices and measures.

Why You Need an Investment Policy Statement? 

With respect to 401(k) and 403(b) retirement plans, where employees are ultimately picking their “investment mix,” investment Committees rely on the IPS to manage the decision-making process for selecting, monitoring, removing and replacing the investment options available to their employees, or plan participants. A properly drafted IPS is the blueprint for Committee members in terms of managing the overall plan. Investment Committee members need to be familiar with the contents of the IPS in order to properly perform their duties as plan fiduciaries. The IPS serves as the foundation to helping Plan Fiduciaries and Committee members navigate the complex rules and regulations of ERISA (Employee Retirement Income Security Act) law and maintain a suitable and competitive investment menu for their employees, at all times.

Who is Responsible for Drafting or Amending the IPS?

While drafting and maintaining the IPS is the responsibility of investment Committee members, most investment Committees engage an independent retirement plan consultant, alongside their outside counsel, to write, maintain, and amend the IPS.

How Often Should the IPS be Reviewed?

We recommend investment Committee members review the IPS on an annual basis (or more frequently, if necessary) to confirm that it complies with ERISA and to reeducate Committee members on the processes and procedures outlined in the IPS. Based on regulatory or legislative changes, the IPS may need to be amended. Additionally, if the organization and/or its investment advisors alter their review and monitoring process, the IPS should be updated as well. While review of your IPS should be consistent and frequent, material changes to the IPS are not expected. 

How do You Document the IPS is Being Followed?

Familiarity with the IPS is critical so that the actions taken by Committee members are compliant with said IPS.  When we work with new clients, we review the existing IPS to confirm the Committee is acting in accordance with the IPS and prevailing law.  When we find discrepancies, it is usually because Committee members have not reviewed the IPS since the last amendment and have fallen into the “out-of-sight, out-of-mind” trap. We document that our Committees are fulfilling their duties and IPS provisions through consistent Retirement Committee review meetings, corresponding reports, and minutes of these meetings.

Do You need a Customized IPS for my Organization’s Retirement Plan?

Drafting an IPS is not a one-size-fits-all process. The content of the IPS should be customized to meet the specific needs of the company that is sponsoring the retirement plan.  Although customization is paramount, the core language in many IPS is similar in terms of the topics covered in the document.  The following topics are generally included in most investment policy statements:

  1. The asset classes that “may” be represented in the plan

  2. Active, Passive, or Asset Allocation Funds

  3. The QDIA election

  4. The criteria for selecting investment managers

  5. The criteria for monitoring funds

  6. The process for replacing funds

  7. The process for monitoring the management fees for the investment options and the overall fees of the plan

  8. Process for updating or amending the IPS

A poorly written IPS can create “traps” that might subject an organization and their Committee to excess liability or a breach of fiduciary duty. Instead, IPS documents should be carefully crafted to provide clear guidelines to prudent Plan management without onerous and “hard-to-follow” rules.

Investment Committee members need to be aware of their fiduciary responsibilities while serving on the investment Committee of their company’s retirement plan.  A well written IPS that clearly outlines the plan’s objectives and processes will assist Committee members in regards to understanding their responsibilities for selecting, monitoring, and replacing the investment options in their company’s retirement plan. We hope this helped in mastering you IPS and if you find you still have questions, just drop us a line!