What Is an Investment Policy Statement (IPS)?

An Investment Policy Statement (IPS) is like a roadmap for managing an investment portfolio, particularly in the context of employer-sponsored retirement plans. It's a document that lays out the investment goals, strategies, and specific guidelines that a fiduciary must follow when managing plan assets. The primary purpose of an IPS is to ensure that the investments made align with the plan's objectives, risk tolerance, and time horizon, all while adhering to the fiduciary duties mandated by ERISA.

Creating an IPS is a best practice for any organization that sponsors a retirement plan. It acts as a safeguard, providing a clear, written record of the criteria used in decision-making processes related to investments. This is especially important because ERISA (the Employee Retirement Income Security Act) requires fiduciaries to act in the best interests of plan participants, which includes making decisions that are both prudent and consistent with the plan's goals.

"An investment policy statement is personal and customized for the circumstances of the advisor's client. The previous example is one type of IPS. Each financial advisory firm will have its own version."

An IPS typically includes several key components:

1. An overview of the plan's purpose and investment objectives
2. Roles and responsibilities of those involved in the investment process
3. Asset allocation strategy
4. Performance benchmarks
5. Risk management measures

Risk management is a critical aspect of an IPS. The document will address the acceptable level of risk for the plan's portfolio and detail measures to manage and mitigate this risk. This might include setting limits on investment types or outlining portfolio rebalancing procedures.

Regular review and updating of the IPS are also essential components. The financial markets and plan participants' needs can change over time, so it's important that the IPS remains relevant and effective. By regularly revisiting and updating the IPS, fiduciaries can ensure that their investment strategy continues to meet the plan's objectives and complies with any new regulations or best practices.

In essence, an IPS is a living document that serves as the backbone of a prudent investment process. It not only helps fiduciaries make consistent and informed decisions but also provides transparency and accountability, which are key to fulfilling fiduciary responsibilities. By adhering to the guidelines set forth in the IPS, plan sponsors can help secure the financial futures of their employees, while also protecting themselves from potential legal liabilities.

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[2] Investopedia. (n.d.). An Example of an Investment Policy Statement. Retrieved from https://www.investopedia.com/articles/investing/060515/example-investment-policy-statement.asp 

[3] Bogleheads. (2024, April 23). Investment policy statement. Retrieved from https://www.bogleheads.org/wiki/Investment_policy_statement 

[4] Financial Edge Training. (2023, September 18). Investment Policy Statement (IPS). Retrieved from https://www.fe.training/free-resources/portfolio-management/investment-policy-statement-ips/ 

[5] FMG Suite. (n.d.). INVESTMENT POLICY STATEMENT SAMPLE. Retrieved from http://static.fmgsuite.com/media/documents/c7eea045-9138-49f5-94dd-9db4be7d870b.pdf