By Michael Cecere, CPA
Gray, Gray & Gray, LLP
Do you know how your money is being invested? Or, if you are the one responsible for managing an investment portfolio, what assurance are you giving your clients that their money is being invested as they would wish?
If you can’t answer these questions, you probably do not have an investment policy statement (IPS) guiding your investment plan. You are not alone. Only about half of 401(k) plans in the U.S. have an investment policy statement. But there is ample reason why every plan should have an IPS.
An investment policy statement is a documented agreement, generally made between an investor and his or her investment manager, or established by an investment committee, to spell out the investment philosophy to be followed. In short, it outlines the way money is to be managed. Think of an IPS as the “rules of engagement” you want applied to your investment strategy.
Creating an IPS gives your investment management team clear guidance on how they should approach their task. The document should define responsibilities, designate eligible and ineligible types of investments, set investment selection criteria, outline investment monitoring procedures, select default investments, define measurement of investment performance, and create procedures for replacing investments that aren’t performing.
Having established an IPS, it is also important that you document that you are, in fact, making use of it to guide investment decisions. Review the IPS annually to make sure investments are aligned with the intent of the IPS.
While an IPS is not a legal requirement, it can be helpful if and when a dispute arises. Federal courts have cited an IPS as evidence of “prudence,” indicating a systematic approach to selecting an investment.
In addition, the Department of Labor (DOL) will often ask to review your IPS during an employee benefits plan audit. Absence of an IPS will not draw a penalty, but it will draw the attention of the DOL, who may be more likely to increase the vigor with which they examine your audit.
If all of this is not enough to convince you of the value of creating and adhering to an investment policy statement, consider the enormous value derived simply by going through the process of drafting an IPS. It is an opportunity to more clearly define – for everyone involved – the comfort level you have with the types of investments being made, as well as the level of risk you can tolerate.
Examples of investment policy statements can easily be found via an internet search, or may be available through your investment advisor. But make sure you do not just “copy and paste” somebody else’s IPS. Take the time to make it your own and enjoy the added control you will exercise over the way your money works for you.
Michael Cecere, CPA is a partner with Gray, Gray & Gray, LLP, a certified public accounting and business advisory firm based in Canton, MA. (www.gggcpas.com)