Quick answer
An investment policy statement, or IPS, is a written document that explains how a retirement plan’s investments are chosen, measured, and replaced. It protects plan sponsors by turning investment decisions into a consistent, repeatable process and by creating a record that shows fiduciaries acted carefully. ERISA does not strictly require one, but it is widely treated as a core governance tool.
Why a written policy matters
When a retirement plan’s decisions are questioned, the key issue is usually not whether an investment did well or poorly. It is whether the people in charge followed a prudent process. Under ERISA, prudence is judged by how decisions were made, using the care and skill a knowledgeable person would apply.
An investment policy statement puts that process in writing before any decision is made. It sets expectations for the plan committee, the adviser, and anyone who later reviews the plan’s records. It also helps keep decisions steady when markets are volatile and emotions run high.
What an investment policy statement usually covers
There is no single required format, and a good IPS should fit the plan it governs. Most include the following sections.
Purpose and scope
A short statement of what the plan is for, which assets the policy covers, and who it applies to.
Roles and responsibilities
Who does what: the plan sponsor, the investment committee, any investment adviser or manager, the recordkeeper, and other service providers. Clear roles help prevent gaps where everyone assumes someone else is handling a task. If an adviser has agreed to act as a fiduciary, the policy can note the scope of that role so it lines up with the service agreement.
Investment objectives
What the plan’s menu is meant to offer participants, such as a range of options across risk levels and asset classes so employees can build diversified accounts.
Selection criteria
The standards used to choose an investment. Common factors include:
- Fees and expenses compared with similar options
- Performance relative to an appropriate benchmark and peer group over several periods
- Risk measures, such as volatility compared with peers
- Consistency of the investment strategy with its stated style
- Manager tenure and organizational stability
Monitoring procedures
How often investments are reviewed, which reports are used, and what triggers closer attention.
Watch list and replacement process
What happens when an investment falls short of the criteria, how long it can stay on a watch list, and how a replacement is chosen and communicated to participants.
Review of the policy itself
How often the committee revisits the IPS to make sure it still fits the plan.
How an IPS protects plan sponsors
| Without a written policy | With a written policy |
|---|---|
| Decisions may depend on who is in the room that day. | Decisions follow criteria agreed on in advance. |
| Funds can stay on the menu for years without a formal review. | Regular reviews are scheduled and documented. |
| It can be hard to explain why a fund was added or removed. | Meeting minutes connect each decision to the policy. |
| Short-term market moves can drive reactive changes. | A defined watch list process encourages measured responses. |
The protection comes from following the document. An IPS that sits in a drawer, or that the committee routinely ignores, can do more harm than good, because it shows the plan set standards and then did not meet them.
Common mistakes to avoid
- Copying a generic template. A policy should reflect the plan’s actual size, participants, and investment approach.
- Making it too rigid. Automatic rules, such as removing any fund that trails its benchmark for one year, can force poor decisions. Most policies allow the committee judgment within a defined process.
- Making it too vague. A policy that says “investments will be reviewed periodically” gives little guidance.
- Not updating it. New investment types, such as risk-based model portfolios, or a change in advisers should prompt a review.
- Skipping documentation. Reviews that are not recorded in minutes are hard to prove later.
Putting the policy to work
An IPS is most useful when it connects directly to a regular review cycle. At each meeting, the committee compares every investment against the policy’s criteria, notes any concerns, and records its decisions and reasoning. Over time, that record becomes the plan’s best evidence of a careful process. The companion article on investment lineup reviews covers how often those reviews typically happen.
At APS Investment Management, the institutional fiduciary arm of APS Pension & Financial Services in Melville, New York, the team works with plan sponsors on investment policy statements and investment lineups. Steven J. Musmanno, the firm’s Chief Investment Officer, chairs the APSIM Fiduciary Investment Committee. Details are on the ERISA fiduciary services page.
What an IPS cannot do
A policy does not guarantee good investment results, and it does not shield fiduciaries if the process is not actually followed. It also cannot replace the judgment and expertise needed to apply its criteria. Its value is in creating structure, consistency, and a clear record.
Key takeaways
- An investment policy statement sets out how plan investments are selected, monitored, and replaced.
- ERISA judges prudence by process, and an IPS makes that process visible.
- Strong policies fit the specific plan and balance clear criteria with room for judgment.
- The protection comes from following the policy and documenting each review.
- The policy should be revisited when the plan, its menu, or its advisers change.
Frequently asked questions
Does ERISA require an investment policy statement?
ERISA does not explicitly require one for most plans, but it is widely considered a sound governance practice because it documents a prudent process.
Who should approve the investment policy statement?
Usually the plan’s investment committee or the plan sponsor’s designated fiduciaries, often with help from an investment adviser and, where appropriate, legal counsel.
How long should an IPS be?
Long enough to explain roles, criteria, and procedures clearly. Many are a handful of pages. Clarity matters more than length.
Should participants see the investment policy statement?
It is mainly a governance document for fiduciaries. Some sponsors share it on request, but participants usually receive separate disclosures about plan investments and fees.
