The Importance of an Investment Policy Statement

Written by: Terry Anderson

As a retirement plan fiduciary, you have a duty to act in the best interests of plan participants and beneficiaries. One important way to fulfill this duty is by creating an investment policy statement (IPS) for your plan.

An IPS is a written document that outlines the plan’s investment goals, objectives, and strategies. It also establishes a process for selecting, monitoring, and replacing plan investments. Here are some reasons why an IPS is important.

1. Helps Establish a Prudent Process

Creating an IPS can help you establish a prudent process for managing plan investments. The process should include guidelines for selecting and monitoring investments, as well as criteria for evaluating their performance. By following a prudent process, you can demonstrate that you are acting in the best interests of plan participants and beneficiaries.

2. Provides a Framework for Decision-making

An IPS can provide a framework for making investment decisions. It can help you stay focused on the plan’s investment goals and objectives, and provide guidance for choosing investments that align with those goals. It can also help you evaluate investment options objectively, based on factors such as performance, fees, and risk.

3. Potentiialy Mitigates Legal Risks

Recent lawsuits have shed light on the importance of having an investment policy statement for retirement plan fiduciaries. For example, the “Perez v. WPN Corporation” lawsuit settled in 2019 alleged that the plan’s fiduciaries failed to prudently select and monitor plan investments, causing excessive fees and losses to participants. Similarly, the “Brotherston v. Putnam Investments” lawsuit settled in 2018 alleged that the plan’s fiduciaries breached their fiduciary duties by failing to remove underperforming investment options and replacing them with better alternatives. These lawsuits illustrate the importance of having an investment policy statement and following a prudent process for selecting and monitoring plan investments.

Don't Forget to Follow it!

In addition to creating an IPS, it’s important to follow the guidelines outlined in the statement. This means regularly reviewing and monitoring plan investments, and making changes when necessary to keep the plan aligned with its investment goals and objectives.

By creating and following an investment policy statement, you can help ensure that your retirement plan is managed in a prudent and effective manner. This can help protect the interests of plan participants and beneficiaries, and mitigate legal risks for plan fiduciaries. If you have questions about creating an IPS for your retirement plan, consult with your plan advisor or a retirement plan specialist.

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