Federal law does not obviously require an “investment policy statement” (IPS), but the statute governing retirement plans (ERISA), does expect that plan trustees will have a specific policy in mind. In summary, there is an assumption that investments being offered to participants have been carefully weighed, and will be monitored for performance, as well as how employees will be made aware of available possibilities.

“Procedural Prudence”

“Procedural prudence” is an important principle in ERISA. This is the expectation that the executives responsible for the plan will establish and follow procedures to ensure the plan is operated prudently, with the interests of plan participants as the top priority. Establishing an IPS accomplishes two things: It requires you to think through what you’re trying to accomplish from an investment perspective, an essential fiduciary act, and proves that you have done so.

If your plan deviates from established policies and the investments perform poorly, you may be creating a smoking gun for litigation. However, if the plan’s investment results are disappointing and you have no policy in place, you’ll still be vulnerable to the charge of lacking procedural prudence.

IPS Components

Common elements of an IPS include the following:

1. Present situation executive summary. This summarizes the plan’s current investments, includes an asset allocation profile, as well as other basic facts about the plan.
2. Statement of purpose. This explains why the document was created and how individuals with responsibility for the plan’s investments should use it.
3. Plan objectives.These can include the all-embracing purpose of the retirement plan itself and the basic responsibilities of the individual plan fiduciaries. A fiduciary resource organization known as fi360 suggests these examples that might be part of the plan objectives:

• Control costs of administering the plan and managing the investments.
• Have the ability to pay all benefit and expense obligations when due.
• Follow general “safe harbor” rules.
• Refrain from giving what could be construed as investment advice except as may be provided by the fiduciary adviser operating under an eligible investment advice arrangement.

4. Duties and responsibilities.Here you would lay out what’s expected of the investment committee, the custodian, investment adviser and fiduciary adviser.
5. Plan asset parameters.This section articulates your general philosophy regarding different asset categories (including subsectors within the broad universe of stocks, bonds and “alternative” investments) and their role in giving employees an appropriate set of choices consistent with the broader objectives of the plan.
6. Monitoring procedures.This section articulates how the plan’s investment committee will review investment performance against stated goals and appropriate investment benchmarks, in order to keep with ERISA’s “procedural prudence” requirement. This is also where you can include a description of how the investment committee will monitor investment management expenses to ensure reasonability and competitiveness.
7. Policy review process.The IPS should contain a provision for regularly reviewing the policy, because changing circumstances within the company or within investment markets may at some point require a revamping of the IPS.

The Educational Policy Statement

It is important to note that having and adhering to a first-rate IPS can’t guarantee your employees will be reaping the rewards. Employees still have to set aside enough of their earnings for retirement savings and choose appropriate investments. For that reason, a new concept, the “education policy statement,” has been suggested as a natural adjunct to the IPS. Creating this type of statement can ultimately demonstrate procedural prudence and ultimately improve “retirement outcomes” (that is, employees being able to retire on schedule).

In order to being the process, employers should begin by assessing how well you believe your employees are doing in taking advantage of the retirement plan and their level of understanding of how it works.

For example, if your plan offers target-date retirement funds, but plan participants allocate only a small portion of their savings to those funds and invest the rest entirely in a stock or bond fund. This suggests the employee doesn’t understand the purpose of the target-date fund, which is to provide the age-appropriate blend of investments.

Similar to the IPS, the educational policy statement should describe how the education effort will be implemented, including the frequency of educational messages and the method of distribution. It should also include its general purpose and its specific objectives, such as what employees are expected to learn about retirement planning and investing.

Finally, it should lay out a way to measure the success of educational efforts, as well as a process for determining alternative educational strategies if the existing methods aren’t producing satisfactory results.

Create a Plan and Follow It

To stay on top of where your retirement plan is going, it’s wise to establish clearly articulated investment and education policy statements, and adhere to those statements. That puts you in the driver’s seat at the 35,000-foot level, which is where you and other plan fiduciaries need to be. It’s not sufficient to let third parties take complete charge over your retirement plan’s investments and employee education effort. A successful outcome is too important to participants to trust your company’s plans to others without your oversight.