The Basics Of A Good Investment Policy Statement

The Basics Of A Good Investment Policy Statement

November 15, 2016

When you take a vacation, how do you plan your trip? Do you just drive to the airport and see where you end up? Or do you choose a destination, book tickets ahead of time, plan the sights you’d like to see, and make reservations at the best restaurants?

For most people, vacations are too important to simply leave up to chance. In much the same way, retirement plans need a plan for their investments. That’s where an Investment Policy Statement comes into play. Smart advisors help their plan sponsors find greater success with their retirement plans by crafting strong Investment Policy Statements.

Why You Need An Investment Policy Statement

Even though they are not required by ERISA, investment policy statements (IPSs) are vital to the success of a retirement plan. They offer a framework and guide for every investing decision that needs to be made, prove to others that a prudent fiduciary process is being followed and protect plan sponsors and fiduciaries from complaints and alleged violations.

What Does A Good Investment Policy Statement Include?

Since there is no legal mandate for IPSs, there are no set requirements. However, there are certain elements that every IPS needs to ensure that it is complete and fully effective. To help your retirement plan sponsors make the most of their opportunities, be sure to include the following in your plan statements:

Statement Of Purpose & Summary

The first thing an IPS needs to do is explain its purpose. It should clearly state who it is for and the goal that the document is trying to accomplish. Then, it is helpful to include a brief summary of the plan’s goals and objectives. It is important to set the “big picture” for the plan in place at the onset, before getting into all of the details.

Goals & Philosophies

An IPS must clearly lay out the plan’s goals to set the standard by which future success can be measured. Clear goals provide a framework in which all decisions can be made for the good of the plan.

It’s important for advisors to spell out the plan’s investment philosophy in detail. This should include things such as risk and return guidelines, liquidity requirements, desired rates of return, and funding characteristics. An appropriate asset allocation strategy also needs to be defined and included.


There should be no doubt as to who is responsible for different aspects of plan management and decision-making. However, specific people or organizations should not be named. Rather, function and responsibility should be described, so that the IPS doesn’t need to be updated every time changes are made. The IPS should also establish guidelines for monitoring the vendors on a regular basis.

Investment Choices

Investment choices should align with the investment philosophies already described in the document. Advisors should strive to seek a balance between being overly detailed and too vague when writing up this part. Too much detail, such as listing specific funds or investment managers, is inflexible and will force you to rewrite the document with every change you make. It needs to be specific enough to provide guidance, though, so the range and type of investment strategies that are allowable would be more appropriate to include. The use of employer securities, if available, should be addressed as well.

Investment Evaluation Criteria

Stating the investment evaluation criteria ahead of time can help protect against accusations of breach of fiduciary duty. The IPS should also require regular monitoring of investments and have clear procedures in place for terminating investment options that are underperforming.

Making Changes

Even with the most diligent planning, life and markets are unpredictable. There is a good chance that things will need to be adjusted and changes made at some point, so it is important to prepare for them in the IPS. It needs to include clear procedures for making modifications and enhancements. In addition, there should be procedures in place to review the IPS regularly to ensure that it is still appropriate and being properly followed.

How We Can Help

Once you have it in place, a good investment policy statement will provide a clear roadmap, making all investment-related decisions for the retirement plan much faster and easier. Most plan sponsors and their advisors have come to realize this, as the Plan Sponsor Council of America’s annual surveys show that the majority of 401(k) plans have an IPS in place.

If your clients don’t have investment policy statements for their retirement plans, you should encourage them to develop one. It will make both your job and theirs easier in the long-run. If you need help writing an IPS, or if you have any questions related to investment policy statements, I can help. I am an experienced retirement plan specialist who works with financial advisors just like you to partner in the successful implementation of client retirement plans.  Contact me at and I can answer your questions.

About Kenny Phan

Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.