Introduction
A well-structured Investment Policy Statement (IPS) provides the Board with clear guidance on its fiduciary duties regarding the organization's investments. A well-structured IPS is essential to a healthy relationship between the Board or Investment Committee and its investments and ensures responsible financial stewardship.
For nonprofit organizations, the IPS serves as a blueprint for aligning investment practices with mission-related goals, ensuring accountability, and prudently managing risk. As financial markets evolve, donor expectations grow, and regulations shift. Regularly revisiting and updating your IPS ensures long-term success and compliance.
What is an Investment Policy Statement?
An Investment Policy Statement is a formal element of nonprofit governance that:
- Outlines the purpose of an organization's investments
- Sets clear objectives and performance expectations
- Establishes parameters for risk tolerance and asset allocation
- Provides guidelines for spending, rebalancing, and manager selection
- Documents the responsibilities of those involved in investment decisions
It acts as a strategic guardrail for boards and investment committees, helping nonprofits remain mission-aligned while navigating volatile market conditions.
Why IPS updates matter
Many nonprofits create an Investment Policy Statement when they first open an endowment or investment account. Without regular updates, Board members lose touch with governance principles, and the document can drift out of alignment with portfolio performance, mission needs, and regulatory expectations.
Common reasons for updating an IPS
- Major changes in organizational strategy or mission
- Shifts in financial markets or macroeconomic conditions
- New state or federal fiduciary guidelines (e.g., updates to UPMIFA interpretations)
- Significant changes in donor demographics or gift composition
- Portfolio underperformance or a change in investment managers
According to the National Council of Nonprofits1, organizations should revisit their IPS annually or as circumstances dictate.
Key components of a best-in-class IPS
1. Statement of purpose
Clarifies why the assets are being invested, including references to mission and any donor restrictions.
2. Roles and responsibilities
Defines duties of the board, finance and investment committees, staff, and any outside advisors.
3. Investment objectives
Establishes expected return targets, income needs, and time horizons.
4. Risk tolerance
Includes metrics and qualitative descriptions of how much volatility and downside risk are acceptable.
5. Strategic asset allocation
Outlines percentage ranges for equities, fixed income, alternatives, and cash. Should reflect the long-term goals of the fund and the board's tolerance for market swings.
6. Spending policy
Establishes the method for determining annual distributions. Commonly used models include:
- Fixed percentage (e.g., 4% of the trailing 12-quarter average)
- Hybrid models incorporating inflation adjustment
- The 7 Percent Rule: While UPMIFA2 doesn't mandate a specific spending rate, it allows states to include a provision that spending exceeding 7% of the endowment's fair market value (averaged over three years) is presumptively imprudent. Note that most states adopted UPMIFA without the 7 percent provision, so it does not apply in every jurisdiction. Verify what your state has codified.
UPMIFA provides considerable flexibility. An institution may spend or accumulate as much as the board determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund was established, within the bounds of donor intent (as stated in the gift agreement) and any applicable state rule, such as the 7 percent provision.
The statute does not specify how frequently the board should revisit its spending decisions. A prudent board should consider adjusting its rate if the current level exceeds the presumption threshold and projected rates of return. Regardless of the chosen policy, it must be disclosed in the financial statement footnotes to increase transparency for donors.
7. Rebalancing guidelines
Provides thresholds for realigning the portfolio to target weights, preventing the actual risk profile from drifting from the intended one.
8. Performance evaluation
Outlines benchmarks that set the bar for performance and how/when performance is reviewed. Benchmarks will change based on the composition of your investment portfolio(s).
What is a benchmark? A benchmark is a reference point for measuring how your portfolio performs relative to similar portfolios.
- Portfolio benchmarks typically use public market indices because they're transparent and easily calculated. For example, for a 70/30 equity-to-bond portfolio, you might use 70% S&P 500 / 30% Bloomberg US Aggregate.
- Peer benchmarks measure against similarly sized or situated organizations. They provide helpful context on relative risk but are harder to standardize because peer organizations vary in their risk approaches, revenue models, and spending needs.
Governance best practices
- Annual IPS reviews. Even if no changes are made, review the IPS at least once per year.
- Documentation. Keep records of decisions, votes, and rationale so the institutional memory survives committee turnover.
- Training. Ensure board and committee members understand the IPS and their fiduciary duties.
- Policy integration. The IPS should reference or align with gift acceptance policies, conflict-of-interest disclosures, and endowment spending policies.
Fiduciary compliance and UPMIFA alignment
Most states have adopted UPMIFA (the Uniform Prudent Management of Institutional Funds Act). UPMIFA requires prudent investment and spending based on a set of factors, including:
- The purpose and duration of the fund
- General economic conditions
- The role each investment plays in the portfolio
- The organization's needs and resources
An IPS should clearly reflect UPMIFA (or state equivalent) considerations, so the board's investment and spending decisions remain defensible and mission-aligned over time.
UPMIFA permits prudent spending from endowments, allowing boards to act flexibly while maintaining documentation of their process
Conclusion
An effective Investment Policy Statement is a living document. It evolves with your organization.
At Farther, we help nonprofits design and revise their IPS to reflect current regulatory expectations, the board's actual risk and return parameters, and the mission the document is meant to support. Whether you have a multi-million-dollar endowment or are building your first reserve fund, the IPS is the document that holds the rest of the work together.
Farther offers a complimentary IPS review for nonprofit boards. If your IPS hasn't been revisited in the last 12 months, we'd be glad to take a look. Please reach out to us today to schedule a meeting.
Book 30 minutes with Aaron for a read of your current IPS and to discuss the items boards may miss.
About Farther
Farther is a registered investment adviser working with nonprofits, individuals, and institutions. Our advisors work with organizations to align investment strategy with their mission, including endowment, reserve, and planned giving.
For more information, please visit our website at https://farther.com/institutions
