Keeping Your Organization’s Investment Policy Up-to-Date

Any Organization that invests assets should have a well-written investment policy statement (IPS).  A clearly defined IPS is central to the idea of good governance of any nonprofit.  It is a document that outlines overall strategy for investing, your short and long-term goals, and the process by which investment decisions are made.

A Board of Directors needs to make critical decisions in regards to investment policy:

  •  Asset allocation (commonly referred to as diversification), and,
  • Spending parameters.

These decisions provide insight into the nonprofit organization’s investment practices, its historical returns on investment, and its compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIRA does apply in the state of Minnesota.  It allows delegation of investment management authority to qualified third-parties, and defines the standard of care for making investment decisions (using 13 factors).

Why is it essential to have a robust IPS?  Board members have fiduciary, or legal, duties as established in corporate law. These are the duty of care and duty of loyalty.  With heightened oversight by the Department of Labor and the Internal Revenue Service, the burden of these duties is greater than ever.  Nonprofit and ERISA audits are including evaluations of investment policies for purpose of disclosure.  There are increased difficulties in meeting missions in a lower return economic environment.  Investment management programs have greater due-diligence requirements and stakeholders are asking for more transparency.

The fundamental components of an investment policy:

  • Outlines decision making authority
    –Defines roles of chief executive, chief financial officer, board of directors, investment committee and outside consultants
  • Defines asset pools
    –Purpose and objectives for each pool
    –Describes time horizons
    –Sets reasonable return expectations
    –Establishes benchmarks
    –Clarifies asset allocation targets and ranges
  • Specifies any prohibited type of securities and allowable securities
  • Establishes performance reporting criteria and review schedule
    –Cash flows, liability and spending
    –Asset class constraints and restrictions
    –Risk tolerance and asset mix restrictions
  • Documents fee disclosure requirements
  • Includes organization’s gift receipt policy
  • Spending policy
    –Spending policy is typically built from determining a “spending rule,” adding a benchmark for inflation, a benchmark for administrative expenses, and some percentage for real growth.  Any spending policy should assume net investment returns.  The methodology may vary dramatically, depending on the organization and its specific needs.In the end, there is a single overarching question that needs to be answered in the affirmative.  Does the IPS collectively guide the investment committee, investment consultants, investment managers and all other responsible parties in meeting the goals and objectives of the organization?

The creation and updating of an investment policy statement can be looked at as more of an art than a science, and is a necessary governance task for every nonprofit organization with investable assets.

How can we help?

  • Should be Empty:
  • Topic Name:

DISCLAIMER: This blog is provided for informational purposes only and is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant. Presentation of the information in this article does not create nor constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, the evolving landscape surrounding these topics is supported by regulations or guidance that are subject to change.

We Value Your Privacy

This site may use cookies to store information on your computer. Some are essential to make our site work and others to improve the user experience. By using this site, you consent to the placement of these cookies and accept our privacy policy.