Does Your Retirement Plan Need an Investment Policy Statement?

Like a coach’s playbook, an Investment Policy Statement is a guide for how to make investment decisions. An IPS offers a framework for decisions to ensure that they are made according to the plan’s goals and values.
If you were a basketball coach who wanted to make it to the championship game, what would you do? Would you gather your team together with any old ball you could find and see what happens? Or would you be more strategic? You would probably obtain a rule book, develop a playbook, and train your team in both. You would practice on a court that meets the league’s specifications with a regulation-size basketball.
Most basketball coaches know they will never win a championship if they don’t know and follow the rules of the game as well as developing and using a playbook unique to their team. It’s too important to simply leave up to chance and hope everything turns out in the end. Just like in basketball, retirement plans need a plan for their investments if they want to be able to win.

What Is An Investment Policy Statement?

Winning retirement plans have and follow investment policy statements (IPS). Although they are not required by ERISA, IPSs are very helpful in keeping a plan’s investments on course regardless of the surrounding circumstances. They also serve as proof that a prudent fiduciary process is being followed, which protects plan sponsors and fiduciaries from complaints and alleged violations.

What Should Be In An Investment Policy Statement?

Since there is no legal mandate for IPSs, how they are made is entirely up to the plan sponsors themselves. There are certain elements, though, that every IPS needs if it is going to be complete and fully effective. To take full advantage of an IPS, you should make sure it includes:

Statement Of Purpose & Summary

The first thing an IPS needs to do is say why it exists. It should clearly state who it is for and the goal that it is trying to accomplish. It is also helpful to include a brief summary of the plan’s goals and objectives. You need to paint the “big picture” for the plan at the beginning before you get into all of the details.

Goals & Philosophies

An IPS must clearly lay out the plan’s goals so that you have a standard by which to measure future success. Coherent goals set the direction towards which all decisions need to point. You will know you are making the right decision if it moves your plan closer to its stated goals.

The investment philosophy also needs to be spelled out in detail. This should include things such as offering a wide range of investment options in various asset classes, so as to allow for diversification and cover a wide range of risk and return profiles or reasonable costs to the plan and participants.

Roles and Responsibilities

It needs to be obvious who is in charge of the different aspects of plan management and decision-making. When writing it out, though, specific people or organizations should not be named. Rather, function and responsibility should be described so that the IPS doesn’t need to be updated every time changes are made. Guidelines for monitoring the vendors on a regular basis should also be included.

Investment Choices

Investment choices need to follow the investment philosophies already described in the document. This section of the investment policy statement can be difficult to write because you need to find a balance between being overly detailed and too vague. Too much detail, such as listing specific funds or investment managers, is inflexible and will force you to rewrite the document with every change you make. However, it needs to be specific enough to provide guidance, so the range and type of investment strategies that are allowable would be more appropriate to include. It should also address the use of employer securities, if available.

Investment Evaluation Criteria

It is important to write out the investment evaluation criteria. Having this pre-established can help protect against accusations of breach of fiduciary duty. Not only should it describe how to pick initial investments, but it should also call for regular monitoring of investments and have explicit procedures in place for terminating underperforming investment options.

Making Changes

No matter how well you plan, life and markets are unpredictable. Most likely, things will need to be changed and adjusted along the way, so it is important to prepare for them in the IPS. It needs to include clear procedures for making modifications and enhancements. There should also be procedures in place to review the IPS regularly to ensure that it is still suitable and being properly followed.

How We Can Help

Once you have it in place, a good investment policy statement will provide a clear roadmap that makes all investment-related decisions for the retirement plan much faster and easier. It seems that most plan sponsors have come to realize this, as the Plan Sponsor Council of America’s annual surveys show that the majority of 401(k) plans have an IPS in place.

If you don’t have an investment policy statement, you should consider developing one. The benefits of having an IPS far outweigh the time it takes and the inconvenience it may cause you to make one. Making an IPS doesn’t have to be very time-consuming and inconvenient, though. When you partner with an experienced pension specialist, you can save yourself a lot of time by leveraging their expertise. Give our office a call at (949) 718-1600 or email us at if you need assistance developing an investment policy statement.

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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