Investment Policy Statement best practices need updating regularly, and now is one of those times. A well-executed investment policy statement can serve as a north star for retirement plan committees and sponsors. If done poorly however, an investment policy statement (IPS) can be a point of confusion and bottleneck for retirement plan committee members. An IPS can often be full of jargon and hard for retirement plan committee members to comprehend. For retirement plan committees challenged by their existing IPS, Eric Altholz, an attorney at leading New England law firm Verrill, recently offered tips for investment policy statement best practices.
In an article penned for legal news site JD Supra, Mr. Altholz cited an example where the company’s retirement plan committee selected a new plan advisor. During the RFP process, the new advisor pointed out that the plan’s existing IPS, which was adopted several years prior, was thin and out of date. The new advisor prepared a new IPS, as an upgrade from the previous one. However, the new IPS was difficult for some committee members to understand. They sought legal advice to ensure they were fulfilling their fiduciary responsibilities. Mr. Altholz shared some observations and recommendations, which he encapsulated in his article for JD Supra.
Although ERISA doesn’t specifically require that a retirement plan committee adopt an IPS, the Department of Labor (DOL) has said the adoption of an IPS is “consistent with the fiduciary obligations set forth in ERISA”. As such, the investment policy statement best practices should always be considered. The IPS helps retirement plan committees to steer the plan’s investment selection process and strategy.
The DOL has not been prescriptive regarding the content that should go into an IPS. However, retirement plan committees should include the information necessary to make informed investment management decisions. Put another way, the IPS does not need to include everything but the kitchen sink, and in fact, it shouldn’t. Given that, Mr. Altholz observed, typically an IPS will:
- Identify the type of plan involved (e.g., a defined contribution plan with individual accounts).
- Describe the investment objectives of the plan. These objectives effectively become the goals of the committee.
- Identify the fiduciary who is charged with overseeing the investment of plan assets.
- State who will be adopting the IPS.
- Describe the criteria and processes for selecting, and deselecting, plan investments (including qualified default investment alternatives).
- Establish performance standards and the process that will be followed to monitor the performance of plan investments.
- Describe the proxy voting policy of the committee.
However, Mr. Altholz offered some amendments, including that the IPS should:
- Have best practices that are good-fit with the plan;
- State that the retirement plan committee has engaged an investment advisory firm (if it has) and clarify that firm’s role in the plan; and
- Establish guidelines and procedures that can be followed methodically by retirement plan committees.
Mr. Altholz asserted that an IPS should be easy for retirement plan committee members to understand and follow. Plan Committee members should seek legal advice, and/or assistance to simplify complicated language so that the provisions in the IPS are able to be carried out. Keeping in mind that while retirement plan committee chairs may often be well-versed in investment parlance, other committee members may not be. Retirement plan committees are often made up of highly intelligent individuals. It is important to ensure all members are on the same page when it comes to following the IPS.