Definition
An investment policy statement is a written document adopted by a plan's fiduciaries that sets out the plan's investment objectives, the criteria used to select and monitor plan investments, and the procedures the fiduciaries will follow in exercising their investment-related duties.
Why it matters
An investment policy statement is not required by ERISA, but the Department of Labor and case law have long treated it as a standard element of a prudent process for plan investment decisions. It is the artifact that most directly documents that the fiduciaries have specified in advance what they will consider, what standards they will apply, and how they will monitor investments — the record against which their subsequent decisions can be evaluated for prudence.
How it works
An investment policy statement typically identifies the plan's investment objectives (asset classes, risk tolerance, benchmark expectations), the criteria for including or excluding investment options from the plan menu (performance, cost, style, provider quality, capacity), the procedures for monitoring investments (frequency of review, sources of data, watch-list criteria), and the process for replacing investments that fail to meet the stated criteria. The document is adopted by the plan's investment fiduciaries — typically the investment committee or the named fiduciary — and is reviewed periodically to confirm that it continues to reflect the fiduciaries' current judgment about the plan's objectives and the appropriate selection standards. When the plan menu is expanded to include a new category of investment (a target date fund suite, a stable value option, or an in-plan lifetime income arrangement), the investment policy statement is typically updated to reflect the specific criteria applicable to that category. The document is a fiduciary process artifact rather than a plan document under ERISA Section 402, so amending it does not require the formal plan amendment procedures — but it is nonetheless treated as evidence of the fiduciary process the fiduciaries actually followed.
In practice
For a plan participant, the investment policy statement is not typically distributed as part of standard participant materials, but is generally available on request from the plan administrator as a plan document under ERISA Section 104(b)(4). For a plan sponsor or an investment committee member, adopting and periodically revisiting the investment policy statement is a standard element of prudent process — the questions the document answers are the questions the fiduciary will otherwise have to answer under litigation scrutiny about how a specific investment decision was made. For a professional advising the plan on adding an in-plan lifetime income option, updating the investment policy statement to specify the criteria that will be used to evaluate candidate arrangements — including provisions for evaluating cost, structure, carrier characteristics, and portability — is typically part of the prudent process for adopting the new option. Individuals encountering the term should recognize that the document is a fiduciary process instrument, not a marketing document or a summary of investment strategy for participants.
Related terms
- ERISA fiduciary
- Named fiduciary
- Investment committee
- Prudent expert standard
- Investment menu design
- Plan document
- Fiduciary breach
- Qualified default investment alternative