Why most plans should not have an investment policy statement

An investment policy statement (IPS) is a written description of a plan’s investment related decision-making process.  While not required, the prevailing view is that any company offering a retirement plan should have this document in place because it will help provide protection from fiduciary liability.  In fact, the Department of Labor will regularly ask for this document in the event of a plan audit.

However, it is actually a bad idea for most companies to have an IPS because they likely will either not follow it or not sufficiently document the process.  The reason is that most companies have a large number of asset classes and fund choices, most of which are actively managed.  As a result, the process becomes extremely complicated to follow.  Here are some examples of questions that come up:

  1. Under what circumstances will the fund managers be replaced?
  2. What happens if the style of the fund changes?
  3. How should the performance standards of the fund managers be determined?
  4. How should these decisions be documented?

There are likely many more questions that companies need to answer, but the idea should be clear:  most plans are set up in a way that makes it extremely difficult to follow and document the steps in an IPS.   Consequently, it’s safer not to have one at all.


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