In the financial industry, the term “Investment Policy Statement” is used a lot – but what is an Investment Policy Statement (or IPS) and do you really need one?
Definition of Investment Policy Statement (IPS)
An investment policy statement is a document written to provide the strategy for selecting and monitoring plan investments. This document lists general rules and portfolio objectives of the plan so it’s easy for a plan advisor or portfolio manager to support and implement the strategy, and an investment committee to monitor.
Information on issues like risk tolerance, types of investments to be included, and asset allocation are some of the things you might find in an investment policy statement.
The Legal Requirements
According to ERISA (the Employee Retirement Income Security Act), it is not required for a plan to have an investment policy statement (nowhere in the law does it state a written document must be created). However, courts have found the absence of a written document like an IPS to fail the prudence test if a plan can’t demonstrate their investment decision-making process.
It’s recommended that all plans (regardless of size) have an investment policy statement since it serves as a blueprint for how the plan’s investments should be managed and helps to demonstrate a prudent process is being followed.
If you’re setting up a new plan, you’ll want to create the investment policy statement first – so you can use it to guide the selection of the plan investments.
For an established plan, implement an IPS and ensure the investments in the plan meet the current selection and monitoring guidelines (make any adjustments needed).
The IPS should be referenced during all plan investment reviews and any time a plan investment no longer meets the guidelines outlined in the IPS, it should be documented. Document what action will be taken (e.g. remove or replace the investment) and the reasons (i.e. what research you reviewed and the quantitative and qualitative reasons for holding an investment, etc.).
Note: An IPS should be written as a long-term business plan. Not too restrictive that it requires constant changes to plan assets, but with enough guidance to demonstrate a prudent process is being followed. That being said – it should not need updated or changed very often, but annually it should be reviewed and updated whenever there is a change to the plan investment philosophy or relevant plan information.
Where to Get an IPS
There are several free templates available on the internet if you run a basic Google search. However, we have discovered that they’re either too complex, may not be relevant to your type of plan, or important information is often missing from the samples.
We’d be happy to provide a sample Investment Policy Statement (or a custom IPS for your plan) if interested – simply contact me at Whitney@reserveinvestments.com or (949) 777-0311.
This information is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. The advisor does not assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.