One of the most important fiduciary duties of a plan sponsor is to have an investment policy in place. An investment policy, sometimes referred to as an investment policy statement (IPS), specifies the investment goals and objectives of the plan, creates a structure for selecting investments, and identifies the procedures to be used in measuring ongoing investment performance. The document can serve as a blueprint to guide fiduciary decision making with regard to plan investments. Once a policy is created, it is very important that plan sponsors follow the terms within the document.
The plan sponsor drafts the investment policy usually with the help of an attorney, a consultant, or a plan provider. There are no specific guidelines in place for what is required to be included in the policy. The recommended approach is to provide an investment strategy and practice understandable to a third party that is flexible enough that it can be implemented in a complex financial environment but not so detailed that it requires constant revisions and updates. Ideally, the investment policy is reviewed at least annually and is continually updated, revised, and developed.
Most investment policies will include:
Is an investment policy required?
Plans are not required by law to have an investment policy, but plan sponsors have the fiduciary responsibility to review, analyze and monitor each investment option offered through their plan. The investment policy is listed as one of NAGDCA's key steps on its Fiduciary Checklist that fiduciaries should follow to meet their fiduciary obligations to the retirement plan and its participants. ERISA states that plans must provide a procedure for establishing and carrying out a funding policy in a method that is consistent with the objectives of the plan, and that a well-documented procedure for investment selection and ongoing investment evaluation is a plan sponsor's fiduciary obligation. The existence of an investment policy statement provides verification of a sensible investment decision making process and can serve as the first line of protection against potential fiduciary liability.
Following are some questions that can be used to re-examine an existing investment policy. This checklist comes from the Investment Selection, Monitoring and Oversight section of NAGDCA's Fiduciary Checklist that can be found in its entirety at http://www.nagdca.org/content.cfm/id/fiduciary_check_list.
Implementing and following an investment policy can prevent problems before they surface. A properly drafted and carefully implemented investment policy helps to ensure plan sponsors meet their fiduciary obligations and helps to contribute to the overall success of the plan.
Neither NAGDCA, nor its employees or agents, nor members of its Executive Board, provide tax, financial, accounting or legal advice. This memorandum should not be construed as tax, financial, accounting or legal advice; it is provided solely for informational purposes. NAGDCA members, both government and industry, are urged to consult with their own attorneys and/or tax advisors about the issues addressed herein.
NAGDCA, Fiduciary Checklist: http://www.nagdca.org/content.cfm/id/fiduciary_check_list
The Investment Policy Statement: A Shield Against Fiduciary Liability in 401(k) Plans: http://www.fiduciarystudies.com/press/pdfs/ips.pdf
Prudent Investment Practices, A Handbook for Investment Fiduciaries: http://www.sec.gov/nb/comments/akendal033105-hand1.pdf
Investment Policy Statements – A White Paper from the Profit Sharing/401k Council of America: http://www.ipsadvisorpro.com/white-papers/2009/04/a-white-paper-from-the-profit-sharing401k-council-of-america/
Investment Policy Statement Guidebook: http://www.oneamerica.com/wps/wcm/connect/d16b928048137f8e9178b57656ded129/invpolicy.pdf?MOD=AJPERES