An “investment policy statement” (IPS) isn’t explicitly required by federal law. However, ERISA — the statute governing retirement plans — does anticipate that plan fiduciaries will have a specific policy in mind. In other words, it’s assumed that they’ll have carefully weighed the investments they want to offer participants, how they’ll monitor the performance of those investments and how they’ll make employees aware of the available possibilities.
An important principle in ERISA is the idea of “procedural prudence.” This is the expectation that the executives responsible for the plan will establish and follow procedures to ensure the plan is operated prudently, with the interests of plan participants as the top priority. Establishing an IPS kills two birds with one stone: It requires you to think through what you’re trying to accomplish from an investment perspective — an essential fiduciary act — and proves that you have done so.
The only downside may be that you’re creating a smoking gun for litigation if your plan deviates from established policies and the investments perform poorly. However, if the plan’s investment results are disappointing and you have no policy in place, you’ll still be vulnerable to the charge of lacking procedural prudence.
Here are common elements of an IPS:
1. Present situation executive summary. This is a summary of the plan’s current investments, including an asset allocation profile, and other basic facts about the plan.
2. Statement of purpose. This explains why the document was created and how individuals with responsibility for the plan’s investments should use it.
3. Plan objectives. These can include the overarching purpose of the retirement plan itself and the basic responsibilities of the individual plan fiduciaries. A fiduciary resource organization known as fi360 suggests these examples that might be part of the plan objectives:
- Have the ability to pay all benefit and expense obligations when due.
- Control costs of administering the plan and managing the investments.
- Refrain from giving what could be construed as investment advice except as may be provided by the fiduciary adviser operating under an eligible investment advice arrangement.
- Follow general “safe harbor” rules.
4. Duties and responsibilities. Here you would lay out what’s expected of the investment committee, the custodian, investment adviser and fiduciary adviser.
5. Plan asset parameters. This section articulates your general philosophy regarding different asset categories (including subsectors within the broad universe of stocks, bonds and “alternative” investments) and their role in giving employees an appropriate set of choices consistent with the broader objectives of the plan.
6. Monitoring procedures. In keeping with ERISA’s “procedural prudence” requirement, this section articulates how the plan’s investment committee will review investment performance against stated goals and appropriate investment benchmarks. This is also where you can include a description of how the investment committee will monitor investment management expenses to ensure reasonability and competitiveness.
7. Policy review process. Changing circumstances within the company or within investment markets may at some point require a revamping of the IPS. The IPS should, therefore, contain a provision for regularly reviewing the policy.
The Educational Policy Statement
Of course, having and adhering to a first-rate IPS can’t guarantee your employees will be reaping the rewards. Employees still have to set aside enough of their earnings for retirement savings and choose appropriate investments. For that reason, a new concept, the “education policy statement,” has been suggested as a natural adjunct to the IPS. Creating this type of statement can ultimately demonstrate procedural prudence and ultimately improve “retirement outcomes” (that is, employees being able to retire on schedule).
The process begins by assessing how well you believe your employees are doing in taking advantage of the retirement plan and their level of understanding of how it works.
Suppose, for example, that your plan offers target-date retirement funds, but plan participants allocate only a small portion of their savings to those funds and invest the rest entirely in a stock or bond fund. This suggests the employee doesn’t understand the purpose of the target-date fund, which is to provide the age-appropriate blend of investments.
Similar to the IPS, the educational policy statement should include its general purpose and its specific objectives, such as what employees are expected to learn about retirement planning and investing. The statement also should describe how the education effort will be implemented, including the frequency of educational messages and the method of distribution.
Finally, it should lay out a way to measure the success of educational efforts, as well as a process for determining alternative educational strategies if the existing methods aren’t producing satisfactory results.
Create a Map and Follow It
It’s not sufficient to let third parties take complete charge over your retirement plan’s investments and employee education effort. A successful outcome is too important to participants to trust your company’s plans to others without your oversight. That’s why, to stay on top of where your retirement plan is going, it’s wise to establish clearly articulated investment and education policy statements, and adhere to those statements. That puts you in the driver’s seat at the 35,000-foot level, which is where you and other plan fiduciaries need to be.