Industry Voices

(b)est Practices: Investment Policy Statements

May 1, 2014 ( - Which statement is true: Having an investment policy statement (IPS) can increase liability, or having an IPS can decrease liability?

By PS | May 01, 2014
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If you chose the first statement, you’re correct, and if you chose the second statement, you’re also correct.

Does your plan already have an IPS?  If you aren’t sure, please find out.  There’s a possibility that someone in your organization, at some point, adopted one.  It’s not uncommon for plan service providers to provide a canned IPS or a fill-in-the-blank template.  If your plan does have an IPS, you want to make sure it isn’t doing more harm than good.

Read through it and see if it makes sense in the context of how your plan is actually being managed.  Examples:

  • If it says quarterly reviews will be held, are they? 
  • If the IPS says minutes will be taken, are they?
  • If it spells out specific triggers to replace funds, do you follow them?

As a rule of thumb, be very careful about the use of “shall”, “must”, and “will” statements.  In case the reason isn’t obvious, just picture a plaintiff’s attorney with a big smile on their face.  For example, let’s say your IPS says a fund will be removed if it underperforms its benchmark for three consecutive quarters.  If you haven’t followed your IPS, you could be financially responsible for any losses incurred subsequent to the point at which the IPS required that fund to be removed.  Ouch!  So, don’t paint yourself into a corner with “mandatory-type” statements.

If you’re starting from scratch, developing an IPS, include enough structure to be able to demonstrate you actually have a “prudent process” by which the plan’s investment menu will be managed.