Why an Investment Policy Statement (IPS) is Vital for Your Retirement Plan

An Investment Policy Statement (IPS) is more than just a document—it's the backbone of a well-managed retirement plan. In the complex world of plan administration, where fiduciaries are tasked with making crucial investment decisions that impact the financial futures of participants, the IPS serves as a guide, ensuring that those decisions are made consistently and with due diligence.

At its core, an IPS outlines the fundamental investment goals of the plan. These goals are not merely abstract concepts; they reflect the real-world objectives of the plan participants, such as securing retirement income or achieving long-term growth. By clearly defining these goals, the IPS helps align the investment strategy with the needs of the participants, creating a focused and purpose-driven approach to asset management.

"An Investment Policy Statement (IPS) can serve to facilitate a prudent process for monitoring the investments offered by the plan, which is at the heart of what acting in a fiduciary capacity is all about."

One of the key components of an IPS is its delineation of risk tolerance. Understanding the acceptable level of risk is essential because it influences every aspect of the investment strategy, from asset allocation to the selection of specific investment vehicles. The IPS provides a framework for balancing risk and return, ensuring that the plan's investments are suitable for the participants' risk profile and time horizon. This is especially important in ERISA plans, where fiduciaries must act in the best interest of the participants, avoiding unnecessary risks that could jeopardize their retirement savings.

Asset allocation is another critical element detailed in an IPS. This section of the document specifies how the plan's assets should be distributed among various investment categories, such as stocks, bonds, and cash. The rationale behind asset allocation is to diversify the portfolio, spreading risk across different asset classes to mitigate potential losses. A well-defined asset allocation strategy within the IPS ensures that the plan remains aligned with its long-term goals while adjusting for market conditions and participant demographics.

In addition to guiding investment decisions, an IPS plays a crucial role in the selection and monitoring of investments. It sets forth the criteria for evaluating and choosing investment options, whether they be mutual funds, exchange-traded funds (ETFs), or other instruments. The IPS also establishes a process for regularly reviewing these investments to ensure they continue to meet the plan's objectives and remain compliant with fiduciary standards. This ongoing review process is vital for maintaining the integrity of the plan and safeguarding participants' interests.

Moreover, an IPS serves as a safeguard for fiduciaries. In the event of a legal challenge or regulatory review, the IPS can be a critical piece of evidence demonstrating that the fiduciaries have adhered to a prudent process in managing the plan's investments. It documents the rationale behind investment decisions, showing that they were made with a clear understanding of the plan's goals and risk tolerance. This transparency not only helps protect fiduciaries from liability but also builds trust with plan participants, who can see that their retirement savings are being managed with care and responsibility.

In summary, an Investment Policy Statement is an indispensable tool for managing a retirement plan's investments. It provides clear guidance on investment goals, risk tolerance, asset allocation, and the selection and monitoring of investments. By establishing a structured approach to decision-making, the IPS ensures that fiduciaries act in the best interest of plan participants, fostering a culture of accountability and transparency. Without an IPS, a plan is like a ship without a compass—vulnerable to drifting off course in the unpredictable waters of the financial markets.

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 [1] Morgan Stanley. (n.d.). Investment Policy Statement. Retrieved from https://www.morganstanley.com/wealth/general/pdfs/investment-policy-statement.pdf 

 [2] Calamos. (2022, August). The Basics of a 401(k) Plan Investment Policy Statement. Retrieved from https://www.calamos.com/globalassets/media/retirement/the-basics-of-a-401k-plan-investment-policy-statement.pdf 

 [3] Beacon Pointe. (n.d.). Does Your Retirement Plan Need an Investment Policy Statement? Retrieved from https://beaconpointe.com/does-your-retirement-plan-need-an-investment-policy-statement/ 

 [4] Benefit Trust Company. (n.d.). Investment Policy Statement (IPS). Retrieved from https://benefittrust.com/insights/1199-2/ 

 [5] Capital Group. (n.d.). Investment Policy Statement. Retrieved from https://www.capitalgroup.com/advisor/insights/articles/ir-ips-401