Investment Policy Statements Crucial to Fiduciary Duty

by Chris Tobe, CFA, CAIA

The Investment Policy Statement (IPS) for a pension plan or other investment pool is a critical element in the governance and is a main fiduciary control on investments.   

As stated in the IFEBP Investment Policy Handbook, “If an employee benefit plan does not have an investment policy statement, it does not have an investment policy.” [i]  Chris Carosa, in his Forbes column, says a “401(k) IPS is a legal document that serves as the solid compliance backbone of the plan”.[ii] Josh Itzoe in his book, the Fiduciary Formula, says about an IPS, “I believe a written investment policy is the only way to demonstrate a thoughtful process and make well informed, prudent investment decisions consistent with the fiduciary requirements imposed by ERISA.” [iii]

A major U.S. regional ERISA law firm for plans remarked,

Since most plans maintain an IPS, not having one can be seen as ‘outside the lines’ and may subject the plan’s fiduciary compliance to greater scrutiny. In fact, it is not hard to imagine a plaintiff’s firm arguing that a plan’s failure to have an IPS is de facto evidence of a fiduciary breach.[iv]

In the CFA standards for Pension Trustees says  “Effective trustees develop and implement comprehensive written investment policies that guide the investment decisions of the plan (the “policies”).” [v] The CFA Code assumes any investments of any size will have an Investment Policy Statement (IPS). 

The Society for Human Resources Management (SHRM) outlined the percentage of defined contribution plans with an Investment Policy Statement.  Basically 90% for plans over $50mm in 2008, most likely much higher today[ii] The complete breakdown was as follows:

$10 million or less – 68%

$10 million to $50 million – 78%

$50 million to $500 million – 90%

$500 million to $1 billion – 89%

More than $1 billion – 92%

I believe any plan without an IPS is in fiduciary breach and they should be reviewed annually. [i].  

[i] 4.5.2   The investment policy statement is reviewed at least annually to ensure it is aligned with current facts and circumstances.


[ii]  Benefits Magazine 2008

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