Do you need an investment policy statement for your 401(k) plan? The answer is “yes,” given the growing complexity of the plans, the number of providers to choose from, the limitless selection of investment options and recent mutual fund scandals.

But, according to an annual survey of defined contribution plan sponsors by PLANSPONSOR magazine, only about two-thirds of sponsors maintain a written investment policy statement and they are more common in larger plans than in smaller ones. In contrast, investment policy statements are the norm for defined benefit retirement plans (in which the plan sponsor makes investment decisions).

There are no hard-and-fast rules for how an investment policy statement should be written. Keeping in mind that the document should be customized to the plan, its sponsor and participants, an investment policy statement might include these items:

  1. Purpose, including a general description.
  2. Investment objectives.
  3. A description of the investment selection process. For example, how can participants access information about investment choices and performance? How often can they make investment changes and how do you make those changes known? How is general investment education handled and does the plan provide for investment advice?
  4. Guidelines for choosing funds — including issues such as diversification, assessing fund performance, asset classes, risk tolerance and expected returns. You can also include information on the assessment and selection of plan providers or fund managers.
  5. The process for monitoring investment options, including the monitoring frequency.
  6. The responsibilities of the investment committee.
  7. The processes for changing investment options, plan providers and fund managers.

A sound investment policy statement guides you through a step-by-step assessment of whether the current investments and managers continue to be the right choices for your plan. It sets the course for a retirement plan and helps manage the decision-making process when it is time for a change. Pressure for change may come from different corners — participants who are concerned after hearing about mutual fund scandals in the media; competing plan providers who say they can offer you a better plan at a better price; or managers inside your company who regularly assess your benefit plans.

Some organizations in the retirement planning field offer model investment policy statements. It is important, however, to adapt any model statement to your plan, objectives and participant group. The time you take to develop an investment policy statement will be well worth it.

Reasons to Make a Statement

According to the Profit Sharing/401(k) Council of America, adopting a formal investment policy statement and documenting that process, has several advantages including:

  • Help plan sponsors manage fiduciary liability.
  • Aid in the event of a plan audit.
  • Clarify the plan’s investment-related goals and objectives.
  • Provide a framework for evaluating investment performance.
  • Ensure continuity when plan fiduciaries change.
  • Assist in communications to plan participants.