What 401k Plan Sponsors Need to Know About the Investment Policy Statement

Scope of Investment Policy Statement

An Investment Policy Statement is a document signed between a portfolio manager and a client that describes general rules, restrictions, and investment structures for the management. In this policy, general objectives and investment goals must be outlined, as well as the strategies that should be employed to meet these objectives and goals.

The IPS must needn’t be described in detail, but it’s important for the plan fiduciaries to understand the document, so every fiduciary can adhere to the following rules: 

1) meaningful guidelines for the committee to fulfill their duties properly 

2) instructions written in a simple way, so an intelligent committee member could understand them and implement them.

Main Purpose and Objectives of Investment Policy Statement

Although all 401k plan sponsors are familiar with the IPS, not everyone knows what it is designed to do. So, here is a brief summary:

Firstly, having an investment policy statement doesn’t necessarily increase plan sponsor liability, it’s just a prudent policy document that makes communication between fiduciaries and their clients easier. An IPS is all about communication, as it sets precise guidelines and procedures for management in the investment process. 

Secondly, it’s not legally required, but having one is equally good for both sides: plan sponsors and their clients, especially if you ever undergo a Department of Labor audit. Nearly 87% of all ERISA-covered plans have an IPS, because not having an investment policy statement is considered a red flag.

Thirdly, once you get your IPS written you have to follow it. Not following the rules can bring some problems in the future, because having an IPS that you don’t follow is even worse than not having one, as it would be evidence that you are in breach of your fiduciary duty.

And finally, a well-designed Investment Policy Statement enables both the investor and the manager to stay focused on the long-term objectives; the IPS provides general investment goals and objectives of a client and describes strategies the manager should implement to meet these objectives.

Scope of Investment Policy StatementMain Purpose and Objectives of Investment Policy StatementWhat Advisors Need to Know about the IPS

So, if you’re an investment manager, it’s up to you to decide whether you need an IPS or not, but a well-conceived statement should make the process more systemized and straight-forward for both sides, and help you avoid potential liabilities. But remember: once the investment policy statement is drawn up, it should be followed carefully, as it’s a guarantee of your clients’ best interest.

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