Article
An Investment Policy Statement (“IPS”) can provide a vital map to the continuing success of a retirement plan qualified under the Employee Retirement Income Security Act (“ERISA”). An IPS sets the parameters for how the plan undertakes its due diligence on behalf of plan participants. It guides the plan sponsor both in its fiduciary duty and its monitoring of third-party providers.
ERISA does not require a retirement plan to have an IPS, but the Department of Labor’s regular practice of asking to see a plan’s IPS in plan audits is a clear best practice indicator.
While the extent of the controls over the investment decision-making practices of fiduciary committees differs somewhat among ERISA plan sponsors, the tests applied to each evaluation focus on standard criteria in an audit. Those criteria include due diligence concerning the selection of money managers, adherence to the IPS specifications, and documentation of the monitoring activities.
Objectives and scope
Key objectives of an IPS audit are to determine whether the fiduciaries of an ERISA qualified plan:
- Have and adhere to policies, procedures, and related controls for initial due diligence and ongoing monitoring of the plan’s investments;
- Have and adhere to policies, procedures, and related controls for selection and ongoing monitoring of external managers of investments;
- The duties and responsibilities of all parties involved are defined;
- Diversification and rebalancing guidelines consistent with specified risk, return, time horizon, and cash flow parameters exist;
- Procedures for controlling and accounting for investment expenses are defined;
- Consistently apply the due diligence process for selecting investment vehicles;
- Passive and active investment strategies are considered, documented, and appropriately implemented; and
- Decisions regarding the use of separately managed and commingled accounts, such as mutual funds and unit trusts, are documented.
Why does a plan need an IPS audit?
Two key factors drive the need for IPS audits.
- External events and market volatility emphasize the need to maintain an investment lineup and decision-making process relevant to the needs of an ERISA plan’s participants.
- The U.S. Department of Labor and class action attorneys use an IPS and a plan’s related documentation as primary determinants of the diligence and competence of the plan’s fiduciaries. The old adage “Where there’s smoke, there’s fire” applies.
When does a plan need an IPS audit?
ERISA requires that retirement and pension plans receive annual audits from a qualified financial auditor once they reach specific plan participant count thresholds. A plan sponsor’s preparation for the financial audits should include an IPS audit conducted in advance by an independent expert in ERISA process audit standards. Plans that aren’t required to have an annual financial audit should, nevertheless, commission a yearly IPS audit.
Roland|Criss conducts IPS audits for ERISA qualified plans.
