Investment Policy Statement – Key Ingredients

Key Ingredients – A recipe for a hearty Investment Policy Statement

When serving up a retirement plan to your employees, your investment policy statement (IPS) is the secret sauce. A well-crafted IPS outlines the guiding principles for choosing and managing plan investments, helping ensure a broad and diverse menu of options is available. It’s also a fiduciary best practice—although not required by law, the IPS is one of the primary documents the Internal Revenue Service and U.S. Department of Labor request when they conduct plan audits. Here are some of the key ingredients that can help make your IPS a recipe for success:

• Plan objectives: your flavor profile. This section explains why the retirement plan exists and how it will serve employees. It also describes the plan’s investment goals. Think of it as the “flavor profile” that guides every decision.
• Roles and responsibilities: the kitchen crew. Define who’s responsible for what. From the plan sponsor and investment committee to the plan advisor, everyone in your “kitchen” should know their role. In particular, the IPS should spell out who has discretion in terms of making investment decisions when changes to the investment lineup are indicated.
• Eligible investments: the main course. An IPS should outline the investments that the investment committee believes are appropriate for your plan and the methodology for choosing them. This may include investment options like target-date funds, managed accounts and collective investment trust funds. Also likely to be included are all nine combinations of large-, mid- and small-capitalization mutual funds spread across the value, blend and growth spectrum.
• Qualified default investment alternatives: a flavor enhancer. These alternatives offer plan fiduciaries safe-harbor protection from certain risks associated with default investments. This section explains the characteristics that a plan investment must have to qualify as a qualified default investment alternative. Target-date funds, a common investment choice within retirement plans, have become the typical qualified default investment alternative choice for plan fiduciaries.
• Performance monitoring: taste testing. Establish criteria to regularly review and evaluate investment performance, including appropriate benchmarks for comparison. Think of this as your “taste test” to ensure every ingredient is working as intended. The criteria, rationale and action steps for removing an investment option from the plan are also included here.
• Review and amendments: the recipe tweaks. Commit to revisiting and updating your IPS periodically. Just like a favorite recipe, your IPS should evolve to reflect changing tastes and circumstances.

Next step: Let’s discuss Employee Wellness. Book a meeting below.