Defined Contribution

A strong investment policy statement (IPS) is your plan’s GPS

With summer in full swing, many people are looking forward to taking vacation. Whether you’re driving, flying or even walking, a GPS can help you navigate unfamiliar routes and ensure you reach your destination.

 

The same holds true for having an Investment Policy Statement (IPS). An IPS is a useful tool to help make sure your client’s retirement plan stays the course. The Employee Retirement Income Security Act (ERISA) doesn’t require plan sponsors to have an IPS but having one in place — and reviewing it regularly — has become a best practice. A strong IPS may support participants in reaching their retirement destination while helping plan sponsors follow the rules of the road and manage fiduciary risk.

Why do small plans need an IPS?

 

While nearly all large plans (96%) have an IPS, according to Callan Institute’s 2022 Defined Contribution Survey, information about small plans’ adoption is less readily available. Still, small plans have the same fiduciary responsibilities as large plans under ERISA. A well-written IPS may provide these benefits:
 

  • Provide a roadmap for financial professionals and plan sponsors to confirm plan objectives, set the investment menu and create a process for selecting and monitoring investments.
  • Offer clarity on roles and responsibilities of all parties involved with running the plan, potentially increasing plan oversight and accountability.
  • Memorialize that a prudent fiduciary process is being followed should allegations of impropriety arise. This may be particularly important, as litigation targeting plan sponsors has exploded over the past several years.

Items to consider

 

Whether your client already has an IPS in place or is starting from scratch, it’s helpful to review some of the key elements you may want to include. In the absence of specific guidance from ERISA, consider including the following sections:

 

1. Purpose and scope: Provides an overview of the specific guidelines and scope of the IPS.

 

2. Plan objectives: Contains a brief description of the purpose and objective of the defined contribution plan, which might include such things as promoting retirement savings and providing participants a range of investments.

 

3. Definition of duties: Describes the roles and responsibilities of various parties involved with running the plan, including the investment committee, recordkeeper, investment manager, third-party administrator and financial professional. The IPS should also describe the plan’s proxy voting policy.

 

4. Investment menu framework: Discusses the investment objectives of the plan. Consider including language around the number and types of options, including use of passive and/or actively managed funds or other investment offerings.

 

5. Investment option selection and evaluation criteria: Includes a well-defined, objective process for the selection and evaluation of the investment options using criteria consistent with the overall goals of the plan. The policy should also establish a framework for the monitoring of a plan’s investments, including benchmarking investment results and expenses and what to do when a fund lags its peers.

 

Note: Share-class selection is an important cost consideration that should be evaluated when selecting investment options, as different expenses may apply to the different share classes. Some share classes may include payments made by the fund(s) to service providers for services provided to the plan. When selecting a share class, plan fiduciaries should consider the extent to which participants would benefit from such payments, including how they may be allocated to plan participants.

 

This is by no means an exhaustive list, and there may be specific areas you need to address that are not included. For example, you may want to consider adding a formal fee policy that includes a cadence for review and specific metrics to evaluate total fees including investments and administration costs.

 

Having a well-defined and clearly articulated IPS is key in today’s challenging investment and regulatory landscape. The IPS fulfills a vital role in helping to lay the foundation of a plan sponsor’s overall governance structure and may help to ensure that fiduciaries achieve their obligations. However, a word to the wise: The worst thing you can do is have an investment policy statement that you do not follow.

SUOW

Sue Walton is a senior retirement strategist with 26 years of experience (as of 12/31/2023). She holds an MBA from DePaul University with a concentration in finance and a bachelor’s degree in business administration, economics and international business from Marquette University.

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.

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