Investment Policy – Why and What to Include?

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

An investment policy is created by an investment committee (those charged with making investment decisions for a retirement plan) to help establish and record its own policies in order to assist in future decision-making or to help maintain consistency of its policies by future committee members/trustees or to clarify expectations for prospective money managers who may be hired by the committee.

According to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), for every qualified company retirement plan (i.e. 401[k], profit sharing, pension, 403[b]) there are certain fiduciary responsibilities for managing plan assets with care, skill, prudence and diligence of a prudent expert and by diversifying the investments of the plan so as to minimize the risk of large losses. This investment policy statement documents these fiduciary responsibilities and ensures fiduciaries are adhering to these responsibilities.

ERISA and the Department of Labor (“DOL”) have established the following procedures for plan trustees:

  • An investment policy must be established
  • Plan assets must be diversified
  • Investment decisions must be made with the skill and care of a prudent expert
  • Prohibited transactions must be avoided

An investment policy statement should set forth the objectives, restrictions, funding requirements and general investment structure for the management of the plan’s assets, and provides the basis for evaluating the plan’s investment results.

When a plan is audited under ERISA, the auditor will request a copy of the most current investment policy being followed by the trustees and review it for the items listed above. Having this policy statement compels the trustees to be more disciplined and systematic, which will improve the investment goals of the plan.

By Leslie A. Lee, CPA