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Investment Policy Statement: Prudent Reading for Fiduciaries

Investment Policy Statement

Investment Policy Statement: Prudent Reading for Fiduciaries

Investment policy statements (IPS) are not a requirement for retirement plan sponsors. However, an Investment policy statement is a generally accepted best practice for plan sponsors to adopt.

Developing and adopting an investment policy statement is a challenge for plan sponsors, especially small business owners. Small business owners lack the necessary resources and expertise to create an IPS, according to a recent Forbes article penned by Chris Carosa, chief contributing editor of In addition, retirement plan sponsors may not fully understand what an investment policy statement is or how to develop one. Many plan sponsors view the investment policy statement as another challenge in setting up a retirement plan for their employees. Moreover, they don’t necessarily understand their fiduciary responsibility, and thus, they are worried that signing their name to an investment policy statement could spell trouble for them down the road.

Plan sponsors sometimes fear an anticipated failure when creating an investment policy statement. Many suffer from “analysis paralysis.” Sponsors don’t always understand the ins and outs of fiduciary duty and investment management. Therefore, some choose not to act at all, thus avoiding creating an investment policy statement for their retirement plan altogether. In addition, an employer may choose to not adopt a retirement plan for employees because the risk is perceived as being too high. The investment policy statement can be a portion of this risk; plan sponsors may perceive it as exposing them to regulatory scrutiny and risk, Mr. Carosa noted.

Plan sponsors are right to think that way. If a plan is put in place, retirement plan sponsors are exposed to regulatory oversight. An investment policy statement puts that fact in writing. Plan sponsors fear increased scrutiny and audits by the Department of Labor and Internal Revenue Service, and they worry that putting an investment policy statement in writing means they have to follow it to the letter. Doing so could potentially expose sponsors to compliance concerns and lawsuits.

Nonetheless, plan sponsors shouldn’t let theirs fears about an investment policy statement get the best of them, Mr. Carosa opined. To get over the fear, he added, plan sponsors should consider what they normally do when faced with fear of the unknown and forge ahead. For starters, sponsors should educate themselves on the wording of the investment policy statement and the compliance process that results from adopting an IPS. Moreover, sponsors should consult an ERISA attorney to help them create an investment policy statement that’s legally sound and compliant. In addition, plan sponsors can rely on an investment policy statement to specify, along with vendor agreements, what roles third party providers play with regard to maintaining a retirement plan in compliance.

The more plan sponsors refine and hone their investment policy statement, the less anxiety they will experience over time. According to Mr. Carosa, the best way for retirement plan sponsors to avoid a bad experience is to work with expert professionals who “have demonstrated aptitude and proficiency when it comes to ERISA matters and retirement plans.”

Having a clear, compliant investment policy statement in place is not only important, it’s necessary to manage a successful retirement plan that serves the best interests of participants. With help from the right professionals and experts, plan sponsors needn’t fear the creation or execution of a thoughtful, well-crafted investment policy statement.

Steff Chalk

Steff Chalk

Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.
Steff Chalk

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