Quick Answer
ERISA does not require a written Investment Policy Statement, but the Department of Labor treats one as evidence that a fiduciary followed a prudent process. Once a plan adopts an IPS, deviating from it is itself a fiduciary breach, so the same document that protects a fiduciary can also expose one.
This lesson covers what an IPS contains, why the DOL expects one even though ERISA does not mandate it, and the fiduciary-breach risk that comes from ignoring your own written policy.
An Investment Policy Statement (IPS) is a written document governing how a retirement plan's assets are to be managed. It defines the investment philosophy, decision-making framework, and processes that plan fiduciaries follow.
Is an Investment Policy Statement Legally Required?
- Not legally required by ERISA statute, but strongly recommended by the Department of Labor (DOL) as evidence of procedural prudence
- The DOL has stated that maintaining an IPS is consistent with ERISA's prudent-expert duty and exclusive-benefit rule
- Once adopted, the plan fiduciary must follow the IPS; failing to follow your own IPS is a fiduciary breach
Exam Tip: Gotchas
- An IPS is NOT legally required by ERISA, but the DOL expects one as evidence of a prudent process.
What Does an IPS Typically Include?
- Plan's investment objectives and goals
- Roles and responsibilities of fiduciaries, advisers, and service providers
- Asset classes and types of investment options to be offered
- Criteria for selecting, monitoring, and replacing investments (quantitative and qualitative benchmarks)
- Rebalancing guidelines
- Proxy voting policies
- Documentation and review procedures
Why Is an IPS a Double-Edged Sword?
- While an IPS demonstrates prudence, failing to follow your own IPS creates fiduciary liability
- Fiduciaries must regularly review and update the IPS as circumstances change
What Should You Check on Exam Day?
- ERISA does not require an IPS, but the DOL treats one as evidence of a prudent process consistent with the duties of loyalty and prudence.
- Once a plan adopts an IPS, the fiduciary must follow it; deviating from your own IPS is itself a fiduciary breach.
- A typical IPS covers investment objectives, fiduciary/adviser/service-provider roles, asset classes, selection and monitoring criteria, rebalancing guidelines, proxy voting policy, and documentation and review procedures.
- The IPS cuts both ways: it is evidence of prudence when followed, and evidence of a breach when ignored.