Investment Policy Statement Should be Implemented Slowly
Investment Policy Statement (IPS) documentation should not be drafted without thought. Your retirement plan’s Investment Policy Statement (IPS) is an important document that explains the goals for the retirement plan, the process used to select and monitor the plan’s investments, and the roles and responsibilities of all parties involved in managing the plan assets. The IPS is an important document, but that doesn’t mean plan sponsors have to rush into creating one the instant they adopt a retirement plan. In fact, taking your time crafting an Investment Policy Statement may actually be the best and most prudent course of action.
Recently, Mr. Christopher Carosa penned an article for BenefitsPro. Mr. Carosa is a frequent contributor to BenefitsPro, and is also the Chief Contributing Editor for the industry trade journal Fiduciary News. Indeed, Mr. Carosa opined, “Now, I’m going to say something that will rankle a few feathers. I’m not sold that you need to adopt an Investment Policy Statement when the plan starts.” It is not necessarily a popular opinion, to be sure, but it may be worth consideration.
Indeed, most plan sponsors don’t have the retirement plan experience to adopt an Investment Policy Statement for a brand-new plan. Mr. Carosa recommends that plan sponsors not be so hasty in their adoption of an Investment Policy Statement. Yes, it is a best practice for retirement plan sponsors and fiduciaries to have an Investment Policy Statement in place, but there’s no need to speed through its creation simply for the sake of having one.
As Mr. Carosa aptly pointed out in the BenefitsPro article: “Investment Policy Statements can be very unforgiving. Worse, what works well for one plan sponsor might be disastrous for another. This is because an IPS is a legal document. It’s a promise the plan sponsor makes to plan participants. And it’s enforced by regulators. And a breach of that promise exposes the plan sponsor to a liability they could have easily avoided.”
Thus, plan sponsors should proceed slowly when it comes to developing the Investment Policy Statement for their retirement plan. While an Investment Policy Statement helps to protect a plan sponsor’s fiduciary responsibility, it must be crafted carefully and thoughtfully to meet the objectives of the plan and serve the best interests of its participants.
As such, Mr. Carosa suggests plan sponsors “wade in slowly” and gain experience with the Investment Policy Statement. He wrote, “This practical experience is important. It instructs plan sponsors as to the limits of their capabilities. Knowing these limits allows plan sponsors to make sure their IPS is worded in a way that keeps their obligations within those natural limits. They won’t learn these limits, though, unless they test drive their 401(k) plan for some certain amount of time.”
So in short, plan sponsors do not need to be rushing to adopt an Investment Policy Statement at the inception of their qualified retirement plan. Proceed with caution. Get into the flow and become familiar with all of the processes and procedures involved with running a retirement plan. And as Mr. Carosa wrote, “Know what it means to make a commitment to those procedures.” This will help you to learn the nuances of your Investment Policy Statement, and make you a better and more confident steward of your plan for it.
