Understanding the ERISA Framework That Governs an IPS
An Investment Policy Statement for an ERISA-covered retirement plan is not legally mandated by statute; however, it is treated by regulators and courts as a foundational document that evidences procedural prudence. The Employee Retirement Income Security Act imposes fiduciary duties of loyalty and prudence, which are process-centric. An IPS that is carefully drafted, consistently followed, and periodically updated serves as contemporaneous proof that plan fiduciaries adopted and executed a prudent process tailored to the plan’s goals and demographics. In my experience advising plan sponsors, the absence of a written IPS often correlates with fragmented decision-making, inconsistent fund changes, and weak defense in Department of Labor examinations or litigation.
The complexity of ERISA’s fiduciary regime is frequently underestimated. Seemingly simple decisions, such as replacing a target-date series or modifying a fee structure, require a documented rationale, the evaluation of feasible alternatives, and the assessment of qualitative and quantitative factors. An IPS transforms these moving parts into a coherent governance framework. It is not merely a template; it is a living document that must align with the plan’s design, workforce characteristics, service provider arrangements, and the fiduciaries’ actual practices. As both an attorney and a CPA, I stress that the IPS must harmonize with plan documents, committee charters, vendor contracts, and Form 5500 disclosures to avoid inconsistencies that create litigation risk.
Clarifying Purpose, Scope, and Plan Demographics
A well-constructed IPS begins with a clear articulation of its purpose and scope. State that the IPS guides the selection, monitoring, and removal of investments offered under the plan, sets forth fiduciary roles, and frames the plan’s investment objectives and risk posture. Clarify whether the IPS covers a single plan or multiple plans (for example, a 401(k) and a nonqualified plan), and identify the oversight body, such as a Retirement Plan Committee. It is a best practice to state that the IPS is not a contract and does not supersede the plan document. This prevents claims that a technical deviation from the IPS created a breach per se, while retaining its evidentiary value as a prudence roadmap.
Plan demographics should be described with specificity because investment structure must fit the participant population. Include the number of participants, age and tenure distribution, contribution patterns, employer match formula, auto-enrollment and auto-escalation features, and historic withdrawal and loan behavior. For example, a workforce with a high proportion of near-retirees, low balances, and irregular deferral rates may warrant stronger emphasis on capital preservation options and robust investment education and default design. Avoid boilerplate. If your plan’s demographics change materially due to a merger, layoffs, or acquisitive growth, the IPS should be re-evaluated to ensure the stated objectives and allocation framework remain fit for purpose.
Defining Fiduciary Roles, Delegations, and Documentation Protocols
ERISA’s fiduciary architecture hinges on who has discretion over plan assets and investment options. The IPS must delineate the roles and responsibilities of the plan sponsor, named fiduciary, investment committee, any 3(21) investment adviser and 3(38) investment manager, the recordkeeper, and any non-fiduciary service providers. Describe the extent of delegated authority, reporting obligations, and the frequency of meetings. If a 3(38) manager is engaged, specify the scope of its discretionary authority, the lineup or asset classes it controls, and the required communications and performance reports. If the committee retains final authority, the IPS should explain the decision process, voting procedures, and documentation standards.
Documentation is often where plans falter. The IPS should instruct that all material decisions be memorialized in meeting minutes, that supporting analyses be retained, and that conflicts of interest be disclosed and managed. Establish a centralized repository for IPS versions, committee charters, vendor contracts, investment reports, fee benchmarking studies, and litigation hold notices when applicable. As a CPA, I recommend retention policies that align with ERISA’s recordkeeping rules and practical litigation considerations, typically not less than seven years, and longer for plan design or governance documents.
Articulating Investment Objectives and Risk Tolerance
The IPS must set forth the plan’s investment objectives in a way that is measurable and consistent with participants’ needs. For participant-directed plans subject to ERISA section 404(c), objectives typically include providing a diversified menu that allows participants to construct portfolios at varying risk levels and time horizons, while emphasizing the availability of a Qualified Default Investment Alternative (QDIA). For defined benefit or cash balance plans, objectives may focus on liability awareness, interest rate sensitivity, and funded status volatility. Importantly, the objectives should be framed not as a promise of results but as a guide to prudent process.
Risk tolerance language should address market risk, interest rate risk, credit risk, and manager risk, as well as operational risks like trading errors and cybersecurity events. Avoid generic statements. For example, if the plan uses a stable value fund, the IPS should discuss wrap provider diversification and credit quality standards. If the plan offers a brokerage window, the IPS should describe its limited purpose, participant eligibility, and any monitoring boundaries. A frequent misconception is that offering more funds reduces risk. In reality, excess choice can increase participant confusion and fiduciary burden. The IPS should strike a balance that supports diversification without overcomplicating oversight.
Designing Asset Classes, Default Structure, and Lineup Architecture
Beyond individual funds, the IPS should define the approved asset classes and the rationale for each. Typical categories include U.S. large cap equity, U.S. small/mid cap equity, international developed equity, emerging markets equity, core fixed income, inflation-sensitive fixed income, stable value or capital preservation, real assets, and target-date funds. State whether index and actively managed options will be included and for what purpose. In an era of fee sensitivity, using passive core options can be paired with selective active strategies in less efficient markets, but the IPS should spell out the criteria used to justify active risk and fees.
The default structure deserves special attention. For plans with automatic enrollment, the IPS should identify the QDIA type (for example, target-date series, balanced fund, or managed account), articulate the age-appropriate or risk-based rationale, and outline the review cadence. Discuss glidepath philosophy for target-date funds, including through-retirement versus to-retirement glidepaths, equity exposure at retirement age, and subadvisor diversification. Disclose any plan-specific constraints such as recordkeeper limitations, unitization mechanics, or custom white-label funds. The IPS should clearly state that default decisions will be revisited in light of plan demographics and capital market assumptions, not merely vendor marketing materials.
Establishing Quantitative and Qualitative Selection Criteria
A defensible IPS describes the screening criteria for selecting and retaining investments, mixing quantitative thresholds with qualitative assessments. Common quantitative metrics include performance versus benchmarks and peers over 1-, 3-, and 5-year periods; rolling-period analysis; risk-adjusted measures such as Sharpe and information ratios; downside capture; tracking error for passive funds; expense ratios relative to category medians; manager tenure; and style consistency. For fixed income funds, include duration, credit quality distribution, and sector exposures. State that short-term underperformance alone does not warrant removal, but persistent deviation from expectations triggers review.
Qualitative factors are equally vital. Document evaluation of investment process, team stability, firm ownership, capacity constraints, trading and operations, ESG risk integration (if applicable), and compliance culture. Address share class selection, emphasizing the use of institutional or retirement share classes that minimize fees and revenue sharing. Highlight that fund availability on the recordkeeping platform is a convenience, not a determinant of prudence. In my practice, many plans mistakenly conflate platform menus with fiduciary selection. The IPS should underscore that inclusion results from objective criteria, not sales pressure or pre-existing relationships.
Implementing a Watchlist, Replacement, and Mapping Protocol
An effective IPS includes a watchlist process with clear triggers. Common triggers include benchmark underperformance beyond defined thresholds over specified rolling periods, style drift, manager turnover, material increase in expenses, change in ownership, or compliance concerns. The IPS should specify that the committee will review watchlisted funds at each meeting and document the rationale for retaining, replacing, or Escalating the review. Avoid rigid formulas that force unnecessary turnover; instead, combine rules-based alerts with professional judgment.
The replacement process should outline how candidates are identified, vetted, and approved. Require a side-by-side analysis that compares expenses, performance over multiple cycles, risk metrics, and qualitative attributes. When changes are made, the IPS should set forth a mapping policy that directs assets from the removed option to a suitable alternative, often the most comparable fund or the QDIA. Address blackout periods, participant notices, and any operational constraints. Mapping decisions are frequently second-guessed in disputes, so ensure that the IPS and minutes clearly record the rationale, including how the mapping minimizes disruption and aligns with participants’ best interests.
Fee Reasonableness, Revenue Sharing, and Share Class Selection
ERISA requires fiduciaries to ensure that plan fees are reasonable in light of the services provided. The IPS should mandate periodic fee benchmarking for investment expenses, recordkeeping charges, managed accounts, and advisory fees. Explicitly address the handling of revenue sharing, including whether the plan will prefer zero-revenue share classes, use fee leveling to equalize participant costs, or credit revenue back to participants’ accounts pro rata. Document the analysis that informs these decisions and how the committee monitors ongoing reasonableness, especially when asset growth or market changes alter the fee dynamics.
Share class selection is a recurring litigation flashpoint. The IPS should state a preference for the lowest net-cost share class available to the plan, considering wrap and administrative credits. It should also address when the plan might utilize collective investment trusts or separate accounts for improved pricing and governance, and the due diligence required before doing so. As a CPA, I emphasize that fee transparency and rigorous documentation reduce audit and litigation risk. Many laypersons assume that lower expense ratios automatically indicate prudence; however, the analysis must consider trading costs, implementation quality, and the totality of services, all of which should be memorialized in the IPS and meeting minutes.
Rebalancing, Cash Flows, and Trading Controls
The IPS should specify the rebalancing methodology for any model portfolios, white-label funds, or custom structures. Options include calendar-based rebalancing, tolerance bands around target allocations, or cash-flow driven adjustments. Describe how contributions, withdrawals, and transfers are handled to minimize transaction costs and tracking error. For plans with a stable value option, incorporate protocols for competing fund restrictions and equity wash rules to preserve wrap agreements. Address extraordinary market conditions and the authority to suspend or modify rebalancing temporarily, with appropriate documentation and post-event review.
Trading controls merit explicit mention. The IPS should reference restrictions on market timing and excessive trading, including warnings, redemption fees where applicable, and cooperation with fund companies’ fair valuation policies. State who reviews trade surveillance reports and how violations are escalated. Although these details can feel operational, they are a critical element of risk management, and their absence in the IPS or related governance documents is a common deficiency identified in regulatory examinations.
QDIA Governance and Target-Date Fund Oversight
Because the default investment drives outcomes for many participants, the IPS should create a dedicated section for QDIA governance. Identify the QDIA, its structure, and the rationale for its selection in light of plan demographics, participation rates, and withdrawal patterns. Specify the review cadence for the QDIA, including comparative analyses against peer series, evaluation of glidepath design, underlying fund exposures, and fees. Mandate periodic confirmation that the QDIA continues to satisfy regulatory requirements, and that required notices are delivered timely and accurately.
For target-date funds, delve into details that go beyond headline performance. The IPS should require analysis of equity exposure near retirement, fixed income quality, treatment of inflation risk, and assumptions about participant behavior at and after retirement. Consider whether a through-retirement glidepath aligns with observed participant withdrawals or whether a to-retirement design is more suitable. If the plan offers managed accounts as a default for some participants, the IPS must articulate the eligibility criteria, personalization methodology, additional fees, and the monitoring framework for the managed account provider.
ESG, Proxy Voting, and Special Mandates
Environmental, social, and governance considerations require nuanced treatment under ERISA’s duty of loyalty and prudence. The IPS should state that investment decisions are made based on risk-return factors, and that any consideration of ESG data is undertaken solely as a means to evaluate economic risk and opportunity, unless otherwise permitted by current regulations. Document how the committee or its adviser evaluates material ESG risks such as climate, labor practices, or governance quality within the same analytical framework applied to other financial factors. Avoid categorical exclusions that are not grounded in economic analysis, and memorialize the consistent application of criteria.
If the plan invests through vehicles that involve proxy voting, the IPS should state who has authority for voting, how guidelines are set, and how conflicts are managed. For 3(38) managers or pooled vehicles, ensure that proxy policies are obtained and reviewed. If the plan contemplates special mandates such as custom white-label funds or stable value structures, include the due diligence requirements, including legal review, wrap contract assessments, and stress testing. These enhancements can be beneficial, but they elevate governance complexity and must be anchored by a robust IPS.
Coordination With the Plan Document, Committee Charter, and Vendor Agreements
The IPS cannot exist in a vacuum. It must be consistent with the plan document, summary plan description, and any investment committee charter. Inconsistencies create confusion and litigation risk. For example, if the committee charter requires quarterly meetings, the IPS should not imply semiannual reviews. If the plan document restricts investment types, the IPS must reflect those limitations. Vendors’ service agreements, statements of work, and fee schedules should be reviewed alongside the IPS to confirm that responsibilities and deliverables are aligned. Where necessary, reference these documents in the IPS and maintain cross-references in a governance matrix.
Operational alignment matters. If the IPS directs the use of institutional share classes, verify that the recordkeeper can support those classes and will credit any revenue to participants appropriately. If the IPS calls for monthly performance reports, ensure that the adviser or manager’s reporting cycle matches that cadence. As an attorney, I recommend that the IPS include a clause requiring periodic legal review to confirm consistency with regulatory updates and evolving case law. Well-intended but misaligned documents are a recurring root cause of fiduciary problems, even in plans with diligent committees.
Amendment, Training, and Compliance Assurance
Establish a clear amendment process. The IPS should specify who can amend it, how amendments are approved, and when they are effective. Triggering events for review include material changes in plan design, mergers or acquisitions, service provider changes, investment structure shifts, and regulatory developments. Maintain version control and attach an amendment log that briefly summarizes the changes, the reasons for them, and the approval dates. Distribute updated IPS versions to all fiduciaries and service providers who rely on it, and document receipt confirmations.
Training is essential but frequently overlooked. Require periodic fiduciary training for committee members, covering ERISA basics, recent enforcement actions, best practices in investment oversight, and the specific mandates of the IPS. Incorporate an annual compliance check in which the committee or its adviser evaluates whether practices align with the IPS. Document any deviations, the reasons for them, and corrective actions. This candid self-audit, properly recorded, is a powerful demonstration of good faith and prudence.
Preparing for Examinations and Litigation
Even when a plan operates smoothly, fiduciaries should assume that their decisions could be examined by regulators or plaintiffs’ counsel. The IPS should prescribe a readiness protocol: up-to-date committee rosters; meeting calendars; minutes with exhibits; investment analyses; fee benchmarking reports; and copies of participant notices, including QDIA notices. Maintain a written narrative that ties the IPS provisions to actual practices, highlighting how significant decisions adhered to the IPS. This documentation discipline is not administrative busywork; it is the front line of defense under ERISA’s process-driven standards.
A common misconception is that strong investment performance will shield fiduciaries from claims. In reality, lawsuits often challenge process, fees, share class choices, and documentation, regardless of outcomes. Conversely, a robust IPS, faithfully applied, is often decisive in defending fiduciaries. As counsel and CPA, I advise adopting a litigation hold protocol that can be activated if a claim emerges, ensuring that IPS versions, emails, and analyses are preserved. An IPS that embeds these expectations minimizes panic and improvisation under pressure.
Common Pitfalls and Practical Correctives
Several recurring errors undermine otherwise diligent committees. Boilerplate IPS language that does not reflect the plan’s unique circumstances is a frequent culprit. Another is drafting an IPS that is too rigid to follow, leading to deviations that plaintiffs can highlight. Conversely, an IPS that is too vague fails to evidence a meaningful process. The corrective is to calibrate specificity: define clear criteria, review cadences, and decision rights, while preserving room for informed judgment and exceptions documented in the minutes.
Other pitfalls include neglecting share class reviews after asset growth, failing to revisit the QDIA when demographics shift, ignoring revenue sharing credits in fee benchmarking, and overlooking operational feasibility when selecting funds. The IPS can mitigate these risks by mandating annual fee and share class reviews, demographic scans that inform default design, and pre-implementation checks with the recordkeeper on trading, mapping, and data requirements. Finally, ensure that the IPS is integrated into onboarding for new committee members so institutional knowledge does not dissipate after personnel turnover.
Steps to Draft, Adopt, and Operationalize Your IPS
Translating best practices into action requires a structured approach. First, assemble a drafting team that includes fiduciaries, an investment adviser, ERISA counsel, and, where applicable, a 3(38) manager. Begin with a gap analysis of existing documents and practices. Draft the IPS with concrete provisions covering roles, objectives, lineup architecture, screening criteria, watchlist and mapping protocols, fee policy, QDIA governance, trading controls, and amendment procedures. Circulate the draft for review by all stakeholders and reconcile any discrepancies with the plan document, committee charter, and vendor agreements.
Second, adopt and implement. Approve the IPS through the committee or named fiduciary in accordance with governance procedures. Train all fiduciaries on the IPS. Align reporting so that meeting agendas and adviser reports map to IPS sections, enabling a clean audit trail that shows the committee actually followed its policy. Establish a calendar for reviews: quarterly performance and watchlist, semiannual fee checkpoints if needed, annual comprehensive review, and event-driven updates. Finally, embed continuous improvement: track exceptions, evaluate their root causes, and refine the IPS so that it remains both practical and rigorous.
Why Professional Guidance is Indispensable
Creating and maintaining an effective IPS is not a clerical task. It requires interdisciplinary judgment across law, investments, operations, and accounting. The interplay of ERISA’s fiduciary duties, evolving Department of Labor guidance, platform constraints, capital market dynamics, and participant behavior is intricate. Templates and generic checklists rarely capture this complexity. Moreover, minor drafting choices can have significant consequences, such as inadvertently elevating internal guidelines into binding promises or overlooking necessary delegation language that would otherwise reduce committee workload and risk.
An experienced adviser team brings context, market awareness, and a disciplined process to IPS development. Counsel can ensure legal consistency and defensibility; an investment professional can calibrate quantitative and qualitative criteria; and a CPA can strengthen fee oversight, share class analysis, and audit preparedness. The cost of professional assistance is typically modest relative to the potential cost of fiduciary disputes or regulatory findings. In a landscape where even well-intentioned fiduciaries face scrutiny, a tailored and operational IPS is an essential safeguard.
