Legally, creating an investment policy statement (IPS) isn’t mandatory for defined contribution (DC) plans. But the Department of Labor does require plan sponsors to be prudent about selecting and looking after the plan’s investment options. Under DOL regs, plan investment fees should be reasonable, and sponsors should regularly monitor and assess the funds’ performance and appropriateness for participants. At TPSU, we advise plan sponsors on best practices in DC plan management, and creating an IPS is one we talk about a lot.
Indeed, having an investment policy statement can be helpful. An IPS outlines the responsibilities of the investment committee — those who oversee the plan’s investments and all related duties. Essentially, it’s a roadmap that details the plan’s investment philosophy and sets general guidelines about how the funds should be selected and investment menus structured (i.e., is it enough to offer just stocks, bonds and money market funds, or should varying investing styles, like value or growth, also be considered?).
However, the IPS should also detail the investment committee’s actions beyond fund selection, including criteria for monitoring the investment lineup and instructions for removing funds when necessary. Regular reviews can help make sure your plan is providing investment options that are appropriate for participants, as well as reduce potential legal liabilities. (At a TPSU program held at the University of New Hampshire, a Chief Human Resources Officer explains why her company created an IPS and how they use it.)
A recent blog post from ForUsAll, a firm that offers independent 401(k) advice for small and mid-sized businesses, sums up seven items to consider spelling out in an investment policy statement, including the plan’s purpose, investment objectives and criteria, how to monitor and select the plan’s investments, how to measure fund performance, establishing a default fund (known as a qualified default investment alternative, commonly a target date fund), and how to educate participants on investing and the specific funds available in the plan.
Why it is important to have an investment policy statement? For starters, it gives plan sponsors processes and policies to point to as evidence that they are acting prudently in overseeing the plan’s investments and serving their participants’ best interests.
After all, offering a retirement plan as a benefit makes you a fiduciary to the plan and participants. Unless you’ve hired an advisor or provide who’s acting as a 3(38) fiduciary — in other words, they have complete discretion over the plan’s investment strategy and fund selection, monitoring and replacement — you’re the plan’s fiduciary. As such, it’s critical to have a detailed IPS in place that you can prove you’ve followed diligently if your actions are ever questioned, for example by a DOL auditor.
Another benefit of an IPS is that it keeps everyone involved with managing the plan’s investments on the same page, and helps ensure the fund offerings are consistent and performing as expected.
If you already have an IPS, consider taking some time to review it with these guidelines in mind, along with what to avoid, and make any necessary revisions and improvements. If your plan doesn’t have an IPS, these criteria can help you get started on creating one.
