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The Investment Policy Statement - Class 303

As we continue to discuss the fiduciary process, it is essential that we implement specific guidelines to help steer and regulate our decision making processes. However, when working with any board (the Investment Committee in this case), individual opinions can make the decision making process more complex. By implementing an Investment Policy Statement, we are lending some structure to the committee’s procedures when evaluating the 401(k)’s investment line-up. Join us for today’s class to learn more about the IPS.

So the first question is, “what exactly is an Investment Policy Statement?” The IPS, in its most basic form, is your playbook for deciding which investments may be good candidates for your retirement plan and which investment options can be removed from the line-up. However, it’s also a good idea to outline the plan’s objectives and the roles and responsibilities of the plan’s providers as well as the fiduciaries. I should note that the IPS is not a legally-required document but rather is considered a best practice document.
Regarding the plan’s investment options, the criteria can be rather basic to start and then we can get more detailed as we go. For example, your Investment Policy Statement might dictate that your 401(k) will only entertain mutual funds as potential investment options for the participants. Therefore, ETF’s, insurance products, and annuities would not be considered for the investment line-up of this plan.  Once we've established what type of investments are candidates for the fund line-up, we can further refine the mutual fund universe into the asset categories we would like to see represented within the investment line-up. The IPS may state that your plan will offer target date funds, a preservation-of-capital option, bond funds, domestic equity funds, and foreign equity funds. By offering a decent breadth of investment options, you are giving the participants the resources they need to select a suitable asset allocation regardless of their age, risk tolerance, or time horizon until retirement.
Another provision that can be included in your IPS might focus on the mutual funds’ investment fees. For example, your IPS might state that your plan will only offer mutual fund options in the least expensive share class. This would ensure that the participants are accessing the lowest investment fees available for that particular mutual fund.
This leaves us with the question of “how do we rate our current investment menu and how do we determine which other investment options would be considered viable options?” This is where the IPS can really lend some structure to your decision making process. Although scoring mutual funds may seem like an ambiguous exercise, the IPS can outline some basic protocols for your Investment Committee. For example, your IPS could state that any investment option performing in the bottom 75th percentile among their peers can be removed from the investment line-up. Likewise, this same criteria could be implemented to determine which investment options would not be considered for mutual fund additions. We’ll go deeper into scoring mutual funds in next week’s class.
The intended result of the IPS is to keep the fiduciaries within the guidelines of the Department of Labor’s best practices. However, I should note a word of caution to you. There is a certain responsibility that comes with implementing an IPS. The only thing worse than not having an IPS is not following the one you have in place. Since these compliance documents are designed to keep you on track, it makes sense that you should adhere to its procedures.
There are other provisions that can be included in your IPS but these examples should give you a feel for how one can help steer this portion of your fiduciary process. Join us for next week's class when we discuss how to build a process around scoring your investment options…

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