PLANSPONSOR - February/March 2020 - 9

UPFRONT
Steps to
Create an
Effective IPS
ALTHOUGH no legislation or regulation
requires retirement plan fiduciaries
to have an investment policy statement
(IPS), doing so is widely considered a
best practice.
Plan sponsors may be unsure how to
begin, but an investment adviser can help.
Plan accountants-i.e., for defined benefit
(DB) plans-and attorneys may also have
ideas, says Scott K. Laue, CFP [Certified
Financial Planner], and a financial adviser
with Savant Capital.
According to Fred Reish, a partner
in the employee benefits and executive
compensation practice group of Faegre
Drinker Biddle, there are different points
of view on what should go into an IPS.
He notes that sponsors can find various
forms on the internet to use as a guide.
The starting point is to determine
what investment categories plan sponsors
want to provide in their investment lineup
or investment portfolio. For defined
contribution (DC) plans, he says, it is
almost inevitable that sponsors will want
to include a target-date fund (TDF). But
they should also consider whether they
want aggressive or conservative investments
and whether they want participants
to have an investment choice allowing
someone to manage their account.
The next step, Reish says, is to develop
an objective and repeatable process for
selecting which investments and services
to offer in the DC plan investment lineup
or DB plan portfolio.
The IPS should state the criteria to
consider when selecting investments.
Reish says some of these are obvious-
e.g., investments should have a fairly
below-average expense ratio-and some
are more complicated, such as what goes
into picking the right share class.
The IPS should also specify how past
performance will be measured, Reish
notes. He says the plan's adviser will be
able to help explain how to measure, as well
as how to assess the quality of investment
management companies and whether to
use services they provide for that purpose.
Finally, the IPS should outline an
investment monitoring process. Reish
says this should cover both how to
monitor and how to change investments.
Part of the process to describe in the IPS
is what to do when a fund has been underperforming
and the plan committee is
concerned. " What typically happens is the
IPS says the investment will be put on a
watch list, " Reish says.
Likely, the committee will investigate
why the performance declined and
what that could ultimately mean, he says.
Investments may be on the watch list
for six months or even a year until the
committee can determine whether it was
just a bump in the road or if the investment
should be removed and replaced.
Art by Hye Jin Chung
The IPS may also describe different
parties' responsibilities to the plan,
Reish says.
Some retirement industry sources
advise against making the IPS highly
detailed, as this will be harder for the
sponsor to adhere to or could lock it into
maintaining an out-moded practice.
However, Reish and Laue disagree.
" The more the IPS identifies parameters,
constraints and objectives, the less
left to interpretation, " Laue says.
He suggests plan sponsors review
their IPS more often than they review
service providers. " The market changes,
products change, there are new trends. I
would say, review the IPS annually, just to
make sure everything is relevant. "
Reish says the IPS should have a
caveat that the policy provides guidelines
and that the plan or investment
committee can take a different action if
doing so is in participants' best interest.
The IPS could also include a provision
that the committee may amend it at any
time, he says. -Rebecca Moore
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