Quick Answer
An Investment Policy Statement is a written document that sets a retirement plan's investment guidelines, objectives, and constraints. It is not legally required by ERISA, but it is a widely recognized best practice, and courts may look for it (or its absence) as evidence of a fiduciary's prudent process. Once adopted, it can become a governing plan document that fiduciaries must follow.
You now know that Employee Retirement Income Security Act (ERISA) fiduciaries must act prudently and that prudence is judged by process, not outcomes. The Investment Policy Statement is the primary tool fiduciaries use to document that process and demonstrate they followed a disciplined approach.
What Is an IPS?
An Investment Policy Statement (IPS) is a written document that establishes the investment guidelines, objectives, and constraints for a retirement plan.
Think of it this way: The IPS is the plan's investment rulebook. It defines how decisions should be made, by whom, and based on what criteria.
- Gives plan committees a decision-making framework
- Provides contemporaneous evidence that fiduciaries acted prudently
- Creates consistency in investment decisions across different committee members and time periods
Legal Status
- An IPS is not legally required by ERISA
- It is a widely recognized best practice consistent with fiduciary obligations, and, depending on how it is adopted and worded, can become a governing plan document the fiduciary's duty of plan compliance requires following
- Courts may look for an IPS (or its absence) when evaluating fiduciary conduct
Exam Tip: Gotchas
- The IPS is not required by ERISA. This is a common exam trap. It is a best practice, and its absence can make it harder to defend fiduciary decisions in a lawsuit, but there is no legal mandate.
Typical IPS Components
A well-drafted IPS typically includes:
| Component | Purpose |
|---|---|
| Plan objectives and purpose | Defines what the plan is trying to achieve for participants |
| Asset allocation targets and ranges | Sets the strategic mix (e.g., equity 40-60%, fixed income 30-50%) |
| Selection criteria | Standards for choosing investment managers and options |
| Monitoring criteria | Benchmarks and triggers for reviewing or replacing investments |
| Performance benchmarks | Specific indices used to evaluate each option |
| Rebalancing policy | When and how to restore target allocations |
| Roles and responsibilities | Who does what - committee members, advisers, custodians |
Why the IPS Matters for Fiduciaries
The IPS has two key functions:
1. Process documentation
- Demonstrates that investment decisions followed a structured, repeatable process
- Provides evidence of prudence if decisions are ever challenged
- Shows regulators and courts that the fiduciary did not act arbitrarily
2. Accountability framework
- Defines clear criteria for when an investment should be placed on a "watch list" or removed
- Prevents emotional or ad hoc decision-making
- Ensures continuity when committee members change
What Should You Check on Exam Day?
- An IPS is not legally required by ERISA, but is a widely recognized best practice; it can become a governing plan document depending on how it is adopted
- Its typical components: plan objectives, asset allocation targets, selection and monitoring criteria, benchmarks, rebalancing policy, and roles and responsibilities
- The IPS documents the decision-making process, giving fiduciaries evidence of prudence if decisions are ever challenged
- Courts look for an IPS (or its absence) when evaluating whether a fiduciary acted prudently