Why Do You Need an Investment Policy Statement?
An Investment Policy Statement states in writing a defined contribution plan's purpose, objectives, investment policy process, and fiduciary responsibilities. It formalizes a framework for plan decision making, participant communication, and management continuity over time.
The Employment Retirement Income Security Act (ERISA) of 1974 requires fiduciaries to take action to protect the interests of their Plan, their participants and beneficiaries. The first of four elements that the U.S. Department of Labor (DOL) considers to be essential elements of a retirement plan is "A written plan that describes the benefit structure and guides day-to-day operations." ¹
"Fiduciaries have the most important, yet misunderstood, role in the investment process: to manage investment practices. {Without an Investment Policy Statement} the components of the investment plan can be neither defined {nor} improved or evaluated. Fiduciary responsibility is not determined by investment performance, but rather by whether prudent investment practices were followed. 'It's not whether you win or lose, it's how you play the game.'² "
The U.S. DOL recognizes an Investment Policy Statement as a fiduciary responsibility to ensure that investment decisions are made in a rational manner to further the purposes of a plan and its funding policy, including issues of liquidity, diversification, prudence, and other fiduciary requirements under ERISA.
Wharton Advisors views the Investment Policy Statement as the important first step for a client's retirement plan success.
¹ "Meeting your Fiduciary Responsibility," the U.S. Department of Labor Employee Benefits Security Administration, 2004
² "Prudent Investment Practices," Center for Fiduciary Studies, 2004