Investment Policy Statement

This lesson covers what an IPS contains, why an optional document becomes binding once a plan adopts 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, and the Department of Labor (DOL) regulation on fiduciary investment duties does not require one either
• ERISA requires every plan to have a written plan instrument, which is a different document. An IPS is voluntary
• Once adopted, the plan fiduciary must follow the IPS; failing to follow your own IPS is a fiduciary breach
• That obligation comes from the duty to follow plan documents, the fourth core fiduciary duty, under which the DOL's regulation measures compliance with an adopted IPS
• The duty reaches plan documents only insofar as they are consistent with ERISA, so it never obliges a fiduciary to follow an IPS provision that ERISA forbids

Exam Tip: Gotchas

• An IPS is NOT legally required by ERISA, and no DOL rule requires one. What the DOL's regulation does is measure compliance with an adopted IPS under the duty to follow plan documents.
• Do not confuse the IPS with the written plan instrument. ERISA requires the plan instrument and names fiduciaries in it. The IPS is optional, and becomes binding only once the plan adopts it.

What Does an IPS Typically Include?

No rule sets the contents of an IPS. The following list is standard professional practice, and it is what the exam expects:

• Plan's investment objectives and goals
• Roles, responsibilities, and reporting requirements of fiduciaries, advisers, and service providers
• Asset classes and types of investment options to be offered, and any investments or strategies the plan is prohibited from using
• Criteria for selecting, monitoring, and replacing investments (quantitative and qualitative standards)
• Performance benchmarks, such as a benchmark index that each investment option is measured against
• Target asset-allocation percentages for each asset class, with permitted deviation bands and the rebalancing guidelines that apply once an allocation moves outside its band
• Fee evaluation criteria for assessing whether investment and service-provider expenses are reasonable and competitive
• Proxy voting policies, which a fiduciary who adopts them must review periodically
• Documentation and review (monitoring) procedures, including how often investments and the IPS itself are reviewed and who reviews them

Why Is an IPS a Double-Edged Sword?

• While a followed IPS helps document a prudent process, failing to follow your own IPS creates fiduciary liability
• A departure is still a breach even when the fiduciary documented the decision, and even when the departure turned out well. Results do not cure the process
• To change the approach, the fiduciary amends the IPS first, then acts under the amended document
• Fiduciaries review and update the IPS as plan circumstances change. ERISA sets no review deadline, so a plan's own stated schedule becomes the standard it is held to

What Should You Check on Exam Day?

• ERISA does not require an IPS, and no DOL rule requires one. The written plan instrument is the document ERISA does require.
• Once a plan adopts an IPS, the fiduciary must follow it; deviating is itself a fiduciary breach under the duty to follow plan documents, which reaches a document only insofar as it is consistent with ERISA.
• A typical IPS covers objectives, roles, permitted and prohibited assets, selection and monitoring criteria, performance benchmarks, allocation bands, fee criteria, proxy voting, and review procedures. No rule fixes that list or a review deadline.
• Documenting a departure does not excuse it, and neither does a good outcome. To change course, amend the IPS first.
• The IPS cuts both ways: a followed IPS documents a prudent process, and an ignored one is evidence of a breach.