An investment policy statement, or IPS, serves as the cornerstone of a well-managed investment process, providing a consistent and structured framework for investment decision-making that aligns with long-term objectives. The preparation and maintenance of the IPS are critical functions to ensure the success of the investment program, so while considerable attention and diligence should be given to the initial writing of the IPS, there should be equal focus on regular monitoring.
As capital markets evolve, laws and regulations change and plan sponsor goals adjust, the guidelines outlined in an IPS can become outdated.
Regularly monitoring and reviewing the IPS is not only prudent but also essential to ensure the retirement plan, from an investment standpoint, remains aligned with its fiduciary obligations and continues to meet the needs of participants. By periodically revisiting the IPS, plan fiduciaries can be best positioned for emerging challenges and new opportunities, while establishing procedural prudence in an ever-changing financial environment.
With that in mind, now may be a good time for plan fiduciaries to revisit the IPS to ensure the guidelines are still applicable and make sense for the plan and plan participants.
Review The Roles
The IPS should expressly define the delegation of duties and responsibilities — with specific attention to decision-making authority — for all parties involved to ensure clarity, accountability and operational efficiency. Clearly defining these responsibilities minimizes ambiguity, reduces the risk of overlapping or neglect of duties and ensures that each party operates within the scope of their expertise and authority.
A periodic review will help identify any change in investment authority that may arise over time.
A periodic review will help identify any change in investment authority that may arise over time; for example, an advisor transitioning from a 3(21) investment advisor to a 3(38) investment manager.
Generally, a defined contribution plan has these investment-related roles: plan sponsor, retirement plan committee, investment advisor or manager and trustee. The trustee role may be a discretionary trustee with the authority and discretion to make all investment decisions for the plan or a directed trustee who is required to act upon the direction of a named plan fiduciary who is not a trustee and merely carries out investment decisions made by the responsible plan fiduciary.
It’s worth noting that the IPS sometimes lists the board of directors and instructs how it allocates or delegates its investment fiduciary responsibilities to other parties, for example, the retirement plan committee.
Assess Investment Objectives And Strategy
Over time, aspects of the plan’s investment objectives might change, which could lead to adjustments needing to be made to the investment strategy. An IPS review should confirm all elements are well aligned with the plan’s current circumstances and future aspirations — by doing so, plan fiduciaries can mitigate risks and maintain an investment process framework that supports long-term financial success.
Key elements that should be assessed in the review may include: ERISA § 404(c) compliance; selection and monitoring processes; Qualified Default Investment Alternative (QDIA); investment benchmarking; and portfolio rebalancing.
Know The Potential Pitfalls
When reviewing the IPS, it is crucial to pay attention to areas and risks that might be encountered in particular situations. Failing to recognize these issues can lead to unintended deviations from your strategy, reducing the effectiveness of the investment program and increasing fiduciary liability risk.
Areas where challenges and risks might occur in certain circumstances:
Putting excessive detail in the IPS. The “Prudent Practices for Investment Stewards” handbook from Fi360 advises the IPS to contain “sufficient detail to define, implement, and monitor the portfolio’s investment strategy.”
Periodic review of the IPS should account for shifts in capital market conditions.
Accounting for changing market structure or new investment products. Capital markets are endlessly transforming, so periodic review of the IPS should account for shifts in capital market conditions, such as market structure, asset class performance or the emergence of new investment opportunities.
Effective structure of the IPS. The IPS will occasionally reference information that is subject to change on a moderately frequent basis, such as the names of board and committee members or capital market assumptions. For these situations, addendums should be used.
Your IPS In Focus: A Call To Action
The IPS is a critical governing document that acts as a guiding framework for managing plan investments and ensuring fiduciary responsibilities are met and investment decisions align with participants’ best interests. Diligent management and regular review of the IPS are essential, making sure it stays relevant and continues to support effective governance and decision-making for the retirement plan.
Revisiting and revising your plan’s IPS is not only a best practice, it’s an essential step toward meeting one’s fiduciary responsibility. Consistent oversight reinforces fiduciary prudence and demonstrates a commitment to the duty of loyalty and protecting participants’ financial well-being.
Kevin Freehardt is Chief Investment Officer of American Trust, and Justin Morgan is Director – Fiduciary Consulting & Advisor Solutions at American Trust Wealth.
