Investment Policy Statement

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 treated by the Department of Labor (DOL) as evidence of procedural prudence
• 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, which the DOL applies to an adopted IPS

Exam Tip: Gotchas

• An IPS is NOT legally required by ERISA, but the DOL expects one as evidence of a prudent process.
• 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 benchmarks)
• 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 procedures, including how often the IPS itself is reviewed

Why Is an IPS a Double-Edged Sword?

• While an IPS demonstrates prudence, 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, but the DOL treats one as evidence of a prudent process consistent with the duties of loyalty and prudence. The written plan instrument is the document ERISA does require.
• Once a plan adopts an IPS, the fiduciary must follow it; deviating from your own IPS is itself a fiduciary breach, under the duty to follow plan documents.
• A typical IPS covers investment objectives, fiduciary/adviser/service-provider roles and reporting requirements, permitted and prohibited asset classes, selection and monitoring criteria, target allocation percentages with rebalancing bands, fee evaluation criteria, proxy voting policy, and documentation 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: it is evidence of prudence when followed, and evidence of a breach when ignored.