- An Investment Policy Statement (IPS) is central to effective board governance and fiduciary responsibility as it sets the guidelines your board governs against and the rules your investment adviser follows.
- A strong investment policy statement starts with your reserve policy: define what each pool of money is for, then set the investment terms around it.
- Match each pool’s investment risk to when the money is needed and the purpose it serves: near-term funds stay conservative, and long-term reserves can often take on more depending on their purpose.
- Choose a broad benchmark for each asset class and keep it fixed, so it stays an honest measure of the strategy over time.
- Adopt the policy formally, document the reasoning behind decisions, and revisit it at least once a year so it stays useful as boards turn over.
Overview
As an investment policy statement is one of the most important governance tools a nonprofit or association board has, following best practices can strengthen an organization’s policy and governance capabilities. A strong policy records how your organization intends to invest the various reserve segments it has built, and it gives every current and future committee member, staff leader, and adviser a shared reference for how investment decisions are made and monitored. Overall, a well-developed policy also helps provide a board with the confidence that its investment program matches the organization’s objectives.
Whether you are building a policy from scratch or strengthening the one you have, this article walks through the essentials: why it matters, who should build it, how it connects to your reserve policy, what to include and what to leave out, and how to adopt, govern from, and maintain it.
Why a Strong Investment Policy Statement Matters
A strong and detailed Investment Policy Statement (IPS) is central to effective board governance and fiduciary responsibility. It sets the guidelines your board governs against and the rules your investment adviser follows for your portfolio, helping to hold your investment program and strategy steady over time.
A strong Investment Policy Statement:
- keeps your investment program aligned with your objectives, matching each reserve pool to an approach that fits its purpose and time horizon
- defines which funds need to remain liquid, so the organization is not forced to sell at a loss to raise cash, and which can be invested for growth
- gives your board broad, representative benchmarks to judge performance against
- clarifies who decides what, from the board and committee to staff and your adviser
- holds strategy steady as board and committee members rotate, giving new members a clear reference for how decisions are made
- supports the documentation auditors expect
- keeps the committee anchored to long-term objectives when markets turn volatile
The Uniform Prudent Management of Institutional Funds Act (UPMIFA), adopted in some form by nearly every state, directs those who manage charitable and institutional funds to act prudently and to weigh the organization’s purposes when making investment decisions. A well-built policy is the clearest record that this thinking has taken place
Who Should Be Involved in Developing Your IPS
It can help to include the people who will implement the policy when you develop or strengthen it, since each brings a different perspective to the conversation. This tends to include three groups:
- The board or finance committee: Typically works alongside the investment adviser to create the policy. The board is responsible for defining objectives and approving the policy, and its involvement in the other parts of development often depends on the role the adviser is asked, or willing, to play.
- Staff, such as the executive director or chief financial officer: Prepare financial information, including day-to-day details such as cash flow patterns and any gift, grant, or dues restrictions.
- The investment adviser: The adviser’s role tends to depend on what the organization wants and what the adviser is able to take on. At Raffa, we begin each client relationship with an in-depth process to confirm that the investment policy and reserve structure are current and representative of the organization’s goals, concluding with recommendations presented to the board for consideration.
The Role Your Reserve Policy Plays in Your Investment Policy
An investment policy statement works best if it is developed after the reserve policy. This is largely due to the purpose of each policy. The reserve policy sets an overall reserve target, organizes assets into pools by purpose and time horizon, and records the rules for drawing on and replenishing each pool. The investment policy statement then governs how each pool is invested and overseen.
Because the reserve structure informs much of the IPS, it is helpful to have it in place first. Our guide “How to Segment Nonprofit Reserves and Create a Reserve Policy” walks through the role purpose plays in segmentation versus time horizon alone, deciding on a segmentation structure for your organization, and creating your reserve policy.
What Your Investment Policy Should Include
A comprehensive investment policy statement generally addresses each of the topics below, whether your portfolio features a single reserve pool or a layered structure with multiple segments. There is no single correct structure; what matters is that each topic is covered in a manner the board is comfortable with and confident in.
Items that should be set once for the whole policy:
| Element | What it Includes |
|---|---|
| Purpose & Scope | What the policy is for, and which reserve pools it covers. |
| Tax Status | If applicable, the organization's tax status and how it affects investment decisions. |
| Monitoring & Reporting | What the adviser reports to the committee, and how often, so results can be overseen. |
| Policy Revisions | When and how the IPS is reviewed and amended, and who approves changes. |
| Roles & Responsibilities | The roles of the board, finance committee, staff, and the investment adviser, covering who sets policy, who implements each aspect, and who monitors results. It also sets the adviser's authority, whether discretionary (acting as an outsourced chief investment officer, or OCIO) or non-discretionary. |
Items that should be set for each reserve segment:
| Element | What it Includes |
|---|---|
| Objectives | What the pool is invested to achieve, such as growth, income, preservation, or liquidity. |
| Time Horizon | When the funds are expected to be used, which drives how much investment risk is appropriate. |
| Cash Flow & Liquidity Needs | Expected withdrawals and how much of the pool must stay readily available. |
| Risk Tolerance & Asset Allocation | How much investment risk is appropriate for the pool, and the target mix of investments and ranges that reflect it. |
| Eligible Investments & Restrictions | Any restrictions on what the pool may or may not hold, including values-based or ESG-based (Environmental, Social, and Governance) restrictions. |
| Diversification Limits | Limits that keep the pool from holding too much in any single investment or sector. |
| Benchmark | A fixed, broad-market reference aligned to the pool's allocation, used to analyze results. |
| Rebalancing | How often the pool is brought back to its target mix, and what triggers an adjustment. |
The sections that follow explain each in more detail.
Purpose and Scope
State why the assets are held, what they will be used for, and which assets the policy covers. Where your organization holds more than one pool of reserves, name each pool and the role it plays. Purpose and scope is the section that ties the document to your mission and to the reserve strategy your board has adopted.
Tax Status
Where it is relevant, note your organization’s tax status, such as 501(c)(3) or 501(c)(6), and how it affects investment decisions. Tax treatment can shape which investments make sense and how investment income is handled, so the policy should record it where it applies.
Monitoring and Reporting
Define what the adviser reports to the committee and how often, so results can be overseen between formal reviews. State the measurement periods and whether returns are reported gross or net of fees, and set out what the committee does when results fall short, such as reviewing underperformance over a rolling three-to-five-year window before making a change. Without that language, every quarterly report can become a referendum on whether to act.
Costs deserve attention here as well, since they are among the few variables a committee can control and they compound over time. A strong policy favors cost-efficient implementation. A lower cost does not replace a sound strategy, but it raises the share of each return the organization keeps.
Policy Revisions
State, within the document itself, how often the IPS will be reviewed and how amendments are made. An annual review is often recommended. Specify the events that trigger an out-of-cycle review, and identify who proposes amendments, who approves them, and how changes are documented. Most organizations handle housekeeping changes at the committee level and substantive changes at the board level. It can be beneficial to keep documentation of changes for future committee members to review and understand.
Roles and Responsibilities
Identify which parties are involved, and what each party’s role and responsibilities are. This includes not only the board, finance committee, and adviser, but also the custodian, auditor, and any other party. Be detailed with each party’s responsibilities to prevent confusion.
Additionally, when assigning responsibilities to the investment adviser, the board will need to consider what level of responsibility and authority it wants the adviser to hold, whether discretionary (OCIO) or non-discretionary.
Learn more about discretionary versus non-discretionary authority.
Objectives
Define what each pool is invested to achieve individually, such as growth, income, preservation of principal, or liquidity. Through segmented reserves, it becomes easier to define the objective. A single objective that tries to cover an entire reserve pool is challenged to do so well.
It also helps to define what relevant objectives, like those for growth, require in numbers. For a pool that funds spending, it is not just about gaining value; it means earning enough to cover what the organization draws each year and to keep pace with inflation on top of that. For example, a reserve that spends 4% a year while inflation runs 3% would need to earn about 7% year-over-year over the long run just to preserve its value. Defining the objective this way shows the committee what return the pool actually has to produce, and whether that return calls for more investment risk than the organization is prepared to take.
Time Horizon
State when the funds in each pool are expected to be used. Along with the pool’s purpose, time horizon is one of the strongest guides to how much investment risk a pool can take, since money that may be spent within a year cannot be invested like money that is not needed for a decade. Setting the horizon for each pool, from near-term operating cash to long-horizon strategic reserves, tells the allocation how much time it has to work with.
Cash Flow and Liquidity Needs
State how readily each pool must be available and when the organization expects to draw on it. An operating reserve often carries a target balance in months of expenses, with a floor that triggers a transfer when it runs low; a short-term reserve holds enough in near-cash instruments to meet the coming year’s withdrawals; and a long-term reserve usually needs little liquidity but should still note any periodic withdrawals. Matching the maturity of the investments to the timing of the need is what keeps a pool from being forced to sell at a loss to raise cash.
Risk Tolerance and Asset Allocation
Define how much investment risk is appropriate for each pool, and the target asset allocation that reflects it. How much risk fits a pool rests on two distinct ideas:
- Risk capacity is your organization’s financial ability to absorb a loss, drawn from how much liquidity each pool needs, how stable and diversified your revenue is, and how long the money can stay invested. It is largely a matter of timing: near-term money should not face meaningful market swings, and thus capacity grows as the horizon lengthens.
- Risk tolerance is the board and committee’s willingness to accept short-term volatility in pursuit of long-term results. This is often gauged through conversations with committee members and a short risk survey of the committee or board.
It is typically helpful to state the resulting tolerance for each pool clearly, such as accepting a meaningful one-year decline in the strategic reserve while expecting the operating reserve to hold its value in nearly all conditions.
The table below shows how objective, horizon, and risk line up across pools.
| Reserve Pool | Time Horizon | Primary Objectives | Typical Risk Posture |
|---|---|---|---|
| Operating Checking Cash | 0 to 3 months | Cover day-to-day expenses | Held in checking for immediate access |
| Current-Year Cash Reserves | Under 1 year | Meet operating needs within the year | Very low; highly liquid instruments |
| Planned Reserves | 1 to 5 years | Fund a known future project | Low-to-moderate; short-to- intermediate maturities |
| Stability or Emergency Reserves | Uncertain | Cushion against disruption | Moderate; balance preservation and purchasing power |
| Strategic Reserves | 7+ years | Long-term growth for the mission | Higher; diversified, balanced allocation |
| Restricted Reserves | Matched to the obligation | Meet donor, legal, or contractual terms | Set by the terms of the restriction |
The asset allocation is the specific mix of investments that carries out the risk level you have set for each pool. Several factors inform it: the pool’s purpose and time horizon, the return it needs to keep pace with inflation, the role each asset class plays, and how those asset classes tend to perform relative to one another. Cost and complexity also matter, since an allocation only works if the committee can understand and maintain it across different market conditions. For each pool, the policy should define the target allocation across the major asset classes, along with the risk parameters it must stay within, so the intended mix is clear and each pool is invested for its own purpose.
Eligible Investments and Restrictions
Define what the portfolio may hold and what it may not, since the allocation alone does not describe the quality or type of security in each class. The lists below are illustrative, and your policy should reflect your own guidelines.
| Often Permitted | Often Excluded |
|---|---|
| U.S. Treasuries and agency securities | Derivatives such as futures, options, and swaps |
| Investment-grade corporate and municipal bonds | Commodities |
| Agency mortgage-backed securities | Hedge funds and private equity |
| FDIC-insured instruments, such as CDs and money market accounts | Privately placed securities |
| Mutual funds and ETFs that hold only eligible securities | Bonds rated below investment grade |
Set quality standards where they matter, such as a minimum credit rating or a weighted average maturity for the fixed income allocation. Additionally, if your organization has decided on any values-based restrictions, include them here as well.
Diversification Limits
Set limits that keep any single holding or sector from dominating a pool. A common approach caps how much of the portfolio may sit with one issuer or in one industry. These limits help guard against concentration risk that the broad asset allocation alone would not catch.
Benchmarks
Name investment benchmarks for each asset class as well as for the total portfolio.
- Asset class benchmarks: Broad-market indexes are generally recommended, such as a U.S. equity index for the stock portion and a broad bond index for the fixed income portion.
- Total portfolio (policy) benchmark: To allow for the most applicable comparison, a blended index that mirrors the target asset allocation is generally used. For example, if the policy calls for 60% equities and 40% fixed income, the total portfolio benchmark represents a 60/40 blend.
An effective benchmark shares four traits:
- Aligned with policy: The benchmark should reflect the general structure of the portfolio, including its allocation across major asset classes.
- Broad and representative: A benchmark should rely on widely recognized broad-market indexes rather than narrow or specialized segments.
- Simple enough to be understood: Every member of your finance committee should be able to look at the benchmark and know what it represents.
- Static over time: An investment benchmark should remain consistent over time and change only when the board formally updates the IPS target allocation, not in response to short-term portfolio adjustments or to make results look stronger.
Our guide to investment benchmarks for nonprofits and associations covers how to select investment benchmarks in greater depth.
Rebalancing
State how the portfolio is brought back to its target mix, and what triggers an adjustment. A common approach rebalances when an asset class drifts past a set threshold from its target, on a regular schedule, or both. A defined rebalancing discipline keeps the portfolio aligned with the risk the policy intends, rather than letting market movement quietly reshape it.
Adopt the Investment Policy Through Your Nonprofit or Association Board
The board is typically responsible for formally adopting the investment policy. Once the policy is finalized, it should be brought to the board for a documented vote, with the effective date noted on the document. The board vote makes the policy official, and at that time it becomes part of the organization’s fiduciary record that auditors and future board or committee members rely on.
If the policy touches on restricted funds, confirm with legal counsel that it matches any donor or member restrictions.
Documenting Investment Decisions for Future Board or Committees Members
Beyond the decisions themselves, it helps to document the reasoning, or “why,” behind them. Doing so maintains continuity, as future board members can review the policy, associated recommendation memos, meeting minutes, and other records to understand the rationale behind the current policy rather than making assumptions or misinterpreting decisions. This supports consistency in how the organization’s investment program is governed.
When to Review and Update Your IPS
Commit to a formal review of the policy on a scheduled basis, generally once a year, in a meeting devoted to the policy and not just squeezed in with other discussions. Depending on the services your investment adviser offers, they may be able to help lead this process.
In addition to a scheduled review, understand and document what events should trigger an out-of-cycle review, including a leadership change, a major gift, a strategic plan refresh, or a significant shift in your organization’s financial situation.
A review does not have to produce changes to be worthwhile. Documenting that the committee considered the policy and concluded no changes were needed is itself a record of prudent oversight.
A few signals that it may be beneficial to revisit your policy include:
- Reserves sit in a single blended pool, or are split only by time horizon rather than by purpose.
- Stability and strategic funds share one portfolio and one investment approach.
- The allocation or benchmark named in the policy no longer matches how the funds are actually invested.
- The benchmark has been changed to track your strategy rather than serve as a fixed reference.
- New committee members cannot easily understand why the current targets were chosen.
- There is no written rule for who can authorize a draw or how a pool is replenished.
The Role Your IPS Plays in Reporting
Your investment policy statement sets the standards that reporting measures against, including the benchmarks, the measurement periods, and what the adviser reports and how often. Investment reporting then applies those standards, showing how each pool and the total portfolio performed against the benchmarks named in the policy over the periods it specifies. This connection gives the committee a consistent basis for oversight, since results are compared to the standards the policy set rather than judged in isolation. When reporting is tied to the policy in this way, each review can confirm whether the program is operating as the policy intends. When reporting is disconnected from the policy, it is harder to tell whether the program is on track.
Raffa's Approach to Assisting Clients With IPS Development and Updates
At Raffa Investment Advisers, we have spent more than 20 years helping nonprofit and association finance committees develop, review, and refine their investment policy statements. Due to the significant role the investment policy and reserve policy play in our client relationships, we start each new client relationship with a thorough review of both policies, ending with formal recommendations and assistance in updating the policies.
This review process begins with a comprehensive financial assessment. We review your financial records, budgets, and current policies, interview key stakeholders and board members, and assess your liquidity needs and capacity to take on risk. This information helps us analyze both policies and provide recommendations on reserve segmentation to finalize a reserve structure.
We then conduct a short risk survey with the committee or board to gauge the group’s collective tolerance for market losses as it relates to the various reserve segments. We use what we learn through this process to provide a set of recommendations, offering reasoning and supporting data behind each recommendation, so your committee has enough context to make decisions.
If desired, we then assist with drafting or revising the policy itself, and can support the ongoing review that helps keep it aligned with your objectives, cash flow needs, and market conditions.
Schedule a Meeting with Our Team of Advisers Experienced in Partnering with Nonprofits and Associations
Frequently Asked Questions: Investment Policy Statements
What is an investment policy statement?
An investment policy statement (IPS) is a written governance document that defines how a nonprofit or association manages its investment program. The board or a delegated committee approves it, and it serves as the standard against which investment decisions are measured.
What should a nonprofit investment policy statement include?
What an investment policy includes, and how it is formatted, may vary from one organization to another. In general, it is typically beneficial to address:
- purpose and scope
- tax status, where applicable
- monitoring and reporting
- how and when the policy is reviewed and amended
- roles and responsibilities
- objectives and time horizon
- cash flow and liquidity needs
- risk tolerance and asset allocation
- eligible investments and restrictions
- diversification limits
- benchmarks
- rebalancing
Who is responsible for creating the investment policy statement?
Responsibility for creating an investment policy statement is shared between multiple members of the organization, the board, and if applicable, the adviser. The board, or a delegated finance or investment committee, owns and approves the policy and sets the objectives and risk parameters. Staff contribute operational detail, such as cash flow needs and any gift or dues restrictions, and provide continuity as members rotate. The investment adviser’s role varies based on the services they provide. Generally, they help translate objectives into an allocation and benchmarks that can be implemented. Some advisory firms, such as Raffa Investment Advisers, may be able to lead the full process and assist in creating the final document. Final approval rests with the board, but a strong policy is built with all three groups involved from the start.
Do nonprofits and associations need an investment policy statement?
Organizations with investable reserves should generally have a written investment policy statement. It supports prudent governance, gives the committee a consistent basis for decisions, and provides documentation that auditors and regulators expect to see. State prudent investor laws, including the Uniform Prudent Management of Institutional Funds Act adopted in nearly every state, require those who manage institutional funds to invest prudently. They do not specifically mandate a written policy, but a written investment policy statement is a widely recognized way to document that prudent process.
How often should we review our investment policy statement?
It is generally beneficial to revisit your investment policy annually to confirm alignment with your organizational goals. In addition, out-of-cycle reviews are often recommended when there is a leadership change, a major gift, a strategic plan refresh, or a significant change in market or regulatory conditions. A review does not need to result in changes; documenting that the committee considered the document and concluded no changes were needed is itself valuable.
About the Author
Ryan Frydenlund, CIMA®, CIPM
Director of Operations & Strategic Adviser
Ryan Frydenlund is the Director of Operations and a Strategic Adviser at Raffa Investment Advisers. Through his role, he advises clients on a broad range of complex topics related to their reserve structure and investment strategy. As an active member in the nonprofit and association community, Ryan has contributed educational content through organizations and outlets such as the American Society of Association Executives (ASAE), the Colorado Society of Association Executives (CSAE), National Council of Nonprofits, UST Education, Association TRENDS, Association Forum, Association Societies Alliance, and others. Additionally, Ryan currently serves as Co-Chair of the Programming and Education Committee for the Colorado Society of Association Executives (CSAE).
Disclosures:
This article was developed with the assistance of AI drafting tools. All content was reviewed and verified for accuracy by Raffa Investment Advisers’ Compliance Team prior to publication.
For informational purposes only. All economic and performance information is historical and not indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this material, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. You should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Investment Advisers or any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Raffa Investment Advisers.
This material does not constitute legal, tax, or investment advice. Investment Policy Statements raise legal and governance considerations that vary by state and by organizational structure.
All information is obtained from sources believed to be reliable, but Raffa Investment Advisers does not guarantee its reliability. Information pertaining to Raffa Investment Advisers’ advisory operations, services, and fees is set forth in Raffa Investment Advisers’ current disclosure statement, a copy of which is available from Raffa Investment Advisers upon request.