Investment Policy - A Blueprint for Monitoring and Managing Your Plan Investments

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:

  • Objectives and purposes of the investment policy. What do you want the plan to accomplish for the plan sponsor and participant?
  • Roles and responsibilities of the governing board, internal staff, investment committee, investment consultant, participants, money managers, and the record keeper.
  • Description of factors a plan will take into account when selecting investments, including risk/return characteristics, guidelines for asset classes, and plan diversification. The factors should reflect a consideration of participant demographics and the purpose of the plan.
  • Description of the frequency and the methodology for how the plan will rebalance its investment portfolio.
  • Define the procedures for controlling and accounting for investment expenses.
  • Procedures for monitoring the investment policy on a continuous basis. The policy should provide guidance for the development of an effective structure for reporting and monitoring results.
  • Description of how the plan will select service providers, including money managers.
  • It is important that nothing is included in the investment policy that the plan sponsor cannot commit to and ensure will be implemented. 

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.  

  • Has the investment policy statement been reviewed within the past 12 months to ensure it reflects current policies and procedures for selecting and monitoring the plan's investments?
  • Does your plan allow participants to achieve efficient diversification by offering investment options in a broad range of diverse asset classes, such as equities, bonds, cash and real estate?
  • Over the past 12 months, has there been a comprehensive review of the plan's investments to ensure they continue to meet the stated objectives in the investment policy statement as appropriate long-term investment vehicles for plan participants?
  • Is the performance of the plan's investment options and their volatility systematically and periodically measured net of fees and compared to appropriate benchmarks?
  • Are the fees and expenses charged by the investment companies evaluated and monitored to ensure they are appropriate as compared to peer funds within the asset class?
  • Are in-house experts or external (third party) resources used to assist in the review of the plan's investment options?
  • If external resources are used, are they free from potential conflicts of interest (i.e., fund providers or brokers are not reviewing their own funds)?
  • Has appropriate action been taken to remove, close or replace investment options, if warranted by the review of the plan's investment options?
  • Do you maintain documentation of your review process, rationale for fiduciary actions, and any other relevant notes or analysis in the plan's due diligence file?

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