Quick Summary
An Investment Policy Statement is the written process for selecting, monitoring, and replacing a plan's investments. ERISA does not explicitly require one, but the Department of Labor treats an adopted IPS as a plan governing document that fiduciaries are expected to follow. A useful IPS sets clear criteria without creating automatic violations. It should be reviewed regularly and referenced in investment meeting minutes.
Every 401(k) plan makes investment decisions: which funds to offer, when to put one on watch, when to replace it. The question is whether those decisions follow a consistent process or happen one at a time based on whoever is in the room.
An Investment Policy Statement, or IPS, is the written process. It describes how the plan's investments are selected, monitored, and replaced. Done well, it makes decisions more consistent and creates a record that shows fiduciaries acted prudently.
Is an IPS required?
ERISA does not explicitly require a plan to have an Investment Policy Statement. However, the Department of Labor has said that a written statement of investment policy is consistent with fiduciary obligations, and that once adopted, it is treated as a governing document of the plan. That means fiduciaries are expected to follow it.
In practice, most retirement plan professionals consider an IPS a standard part of prudent plan governance.
What goes in an IPS
A typical Investment Policy Statement covers:
Purpose and objectives. Why the plan exists and what the investment lineup is meant to accomplish for participants.
Roles and responsibilities. Who does what, including the plan sponsor, any investment committee, the advisor or investment manager, and the recordkeeper.
Investment categories. The types of investments the plan will offer, such as target date funds, stock funds across market sizes and regions, bond funds, and a capital preservation option.
Selection criteria. The factors used to evaluate investments, which may include fees, performance relative to benchmarks and peers over multiple time periods, risk measures, manager tenure, consistency of investment style, and the strength of the investment organization.
Monitoring process. How often investments are reviewed and what reports are used.
Watch list procedures. What causes a fund to be placed on watch and what happens while it is there.
Replacement process. How replacement candidates are evaluated and how changes are communicated to participants.
Default investment. How the plan's qualified default investment alternative is selected and monitored, including how a target date series is evaluated.
Review of the IPS itself. How often the document is reviewed and updated.
Common pitfalls
An IPS can create problems if it is not written or used carefully.
Too rigid. A rule such as "replace any fund that ranks below median for four consecutive quarters" sounds disciplined, but it can create automatic violations whenever the committee reasonably decides to keep a fund for good reasons.
Too vague. An IPS that says only "investments will be reviewed periodically" provides little guidance and little evidence of a process.
Not followed. An IPS that sits in a drawer while decisions are made a different way can be worse than having none, because it documents a process the plan did not use.
Out of date. An IPS written years ago may describe providers, investment categories, or committee members that no longer exist.
Out of step with reality. If the IPS says the committee meets quarterly and it actually meets once a year, the document and practice need to be brought back in line.
Flexible but meaningful
The practical goal is an IPS that guides judgment without replacing it. That often means:
- Treating criteria as factors to consider rather than automatic triggers
- Using "may" rather than "will" where discretion is appropriate
- Describing a watch list that prompts closer review rather than automatic removal
- Setting a review schedule the plan can realistically keep
Using the IPS in practice
An IPS works well as a living document. Each investment review meeting should refer to it, and meeting minutes should show how the criteria were applied. When the committee decides to keep a fund on the watch list, replace it, or add a new category, the minutes should explain the decision in terms of the IPS.
Keep the signed IPS, each prior version, and the minutes that reference it together in your fiduciary file. If questions ever arise, that file shows not only what your policy said, but that you followed it.
The IPS and a 3(38) investment manager
If your plan uses a 3(38) investment manager, the IPS should describe the manager's discretionary authority, the criteria the manager will apply, and how the plan sponsor will monitor the manager's work. The sponsor's role shifts from making investment decisions to overseeing the process.
Want a second look at your plan's Investment Policy Statement, or help creating one? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to review plan governance. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.
Frequently asked questions
How long should an Investment Policy Statement be?
Many are only a few pages. Clarity and usefulness matter more than length.
How often should we update our IPS?
Review it at least annually, and update it when the plan's investments, providers, or decision process change.
Who should adopt the IPS?
Typically the plan sponsor or the investment committee adopts it formally, and the adoption is recorded in meeting minutes.
Do participants receive a copy of the IPS?
It is not typically distributed to participants. Because it may be treated as a plan governing document, sponsors should be prepared to provide it if a participant requests it.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.