How to Write an Investment Policy Statement

An indispensable resource for every financial service professionals developing an IPS

The Investment Policy Statement (IPS) is one of the most critical documents fiduciaries must draft. For years, ERISA and other industry regulations have governed the guidelines all fiduciaries must comply with when drafting one. But the current climate of corporate scandal and the 2008 global banking crisis have led to increased scrutiny by regulators, prompting firms to take a closer look at the quality and integrity of their IPSs and to take steps to have a rigorous formal process in place for drafting them. Endorsed by the Foundation of Fiduciary Studies, this concise guide provides a rigorous framework and the expert insight, information and guidance you need to guarantee that your IPS is in complete compliance with all ERISA-directed requirements.

• Provides a step-by-step plan for creating a uniform IPS that every advisor in the office can follow
• Defines the duties and responsibilities of all parties involved, while clarifying diversification guidelines and providing methods for keeping costs under control
• Packed with ready-to-use templates, sample forms, letters and other documents, diagrams and other valuable tools, including sample Policy Statement downloadable at the companion website
• Designed to get you quickly up to speed on what you need to know to confidently serve your clients with the highest standards of care and protection

Foreword by Don Trone 11

Section One: Why Plan Sponsors and All Fiduciaries Need a Formal Process for Writing Their Investment Policy Statement

Chapter 1 Erisa and the Challenge of Fiduciary Responsibility 17

Writing an Investment Policy 17

What is a Fiduciary? 18

Fiduciary Liability 19

Chapter 2 Your Fiduciary Responsibilities and Liabilities Under Erisa 21

Five Fiduciary Responsibilities 21

Fiduciary’s Personal Liability 22

A Fiduciary’s Primary Role is to Manage the Process 23

Chapter 3 What is an Investment Policy Statement and What are the Benefits? 25

Risk Management 25

Monitor Investments 26

Summary 27

Chapter 4 Utilize the “Safe Harbor” Provisions Provided by Erisa 29

Prudent Experts 29

Five Recognized “Safe Harbor” Rules 29

Chapter 5 Complying with Erisa Section 404(c) 31

Section Two: How to Get Started and Steps to Formalize the Process

Chapter 6 Assembling the Documentation 35

Chapter 7 Steps to Formalize The Process 37

Step 1: Decide on Plan Goals, Objectives, and Strategies 37

Step 2: Decide on Strategy for Managing Risk 37

Step 3: Determine the Risk Tolerance of the PSTEPlan 38

Step 4: Set Forth Guidelines for Asset Classes 39

Step 5: Implement an Asset-Allocation Policy 39

Step 6: Mutual Funds Recommendations 39

Step 7: Delegate Investment Management Responsibility 40

Step 8: Investment Monitoring and Reporting 40

Section Three: The Template IPS

Chapter 8 Sample IPS Templates 43

Two Distinct IPS Samples 43

Organization of Templates 43

Chapter 9 Sample IPS Template #1: For Participant-Directed 401(k) That Intends to Comply with ERISA Section 404(c) 45

Step 1 Executive Summary and Background 45

Step 2 Purpose of the Investment Policy Statement 46

Step 3 Duties and Responsibilities 48

Step 4 Asset Class Guidelines 50

Step 5 Investment Manager Selection 52

Step 6 Monitoring the Investment Managers 53

Step 7 Controlling and Accounting for Investment Expenses 55

Step 8 Investment Policy Review and Monitoring 56

Chapter 10 Sample IPS Template #2: For High-Net-Worth Individual Setting Up a Family Trust 57

Executive Summary 58

Part I—Purpose 59

Part II—Investment Management Objectives 59

Part III— Roles and Responsibilities 60

Part IV— Investment Manager Selection 61

Part V— Investment Monitoring and Review 63

Part VI— Manager Termination 65

Part VII— Additional Provisions (optional) 65

Conclusion Message to Plan Sponsors 67

Glossary 69

Appendix: The Firm Profile 77

About the Author 79

Rocco DiBruno is the author of How to Write an Investment Policy Statement, 2nd Edition, published by Wiley.

"The preparation and maintenance of the Investment Policy Statement is the most critical function a fiduciary performs . . . this compact strategy guide provides advisors and their fiduciary clients with a useful tool that will help them comply with their ERISA-directed requirement."
—Donald B. Trone, CEO (Chief Ethos Officer), 3ethos

ERISA and other guidelines have long required fiduciaries to implement a uni- form process for drafting an Investment Policy Statement (IPS). But historically, enforcement has been lax, leaving companies little motivation to develop a formal practice.

Now, times have changed. Corporate scandals, coupled with volatility in the markets, have generated an increase in complaints, lawsuits and even the possi- bility of government legislation requiring an official IPS. This compact guide will help financial advisors, plan sponsors, money managers and all professional fiduciaries protect themselves, stay in compliance—and stay one step ahead of the government mandate—by putting a simple IPS process in place.

Thornburg Investment Management provides an easy-to-follow framework for producing a well-written IPS based on practices recognized by the Foundation for Fiduciary Studies. In clear terms, he outlines how to . . .

• Define the duties and responsibilities of all parties involved
• Clarify diversification guidelines and keep costs in check
• Identify due diligence criteria for selecting investment options

PLUS: Two Sample Policy Statements are included which can be downloaded directly from the website at: www.thornburg.com/IPS. Both templates make implementing a proper IPS easier and more accurate.

With this thorough guidebook, you can prepare documents that meet all industry standards of compliance and federal regulations with relative ease—every time—while protecting yourself and your firm from liability.