An investment policy statement allows the investment committee to review the investment lineup using consistent, objective criteria. A requirement of ERISA is for the regular monitoring of investment performance by the plan fiduciaries.
The investment committee must be careful to document its findings and ensure that there is a process for freezing funds, adding funds, and replacing funds. Following is a sample list of criteria which may be used to measure performance:
- One, three, and five-year performance vs a benchmark
- Risk as measured by volatility as measured by standard deviation
- Risk-adjusted returns such as the Sharpe Ratio
- Manager tenure
- Returns in excess of market returns as measured by Alpha
- Turnover ratio
- Operating expense