What Should a Nonprofit Investment Policy Statement Include?

The Short Answer

A nonprofit investment policy statement (IPS) is a written document adopted by the board or investment committee that describes how the organization’s investment assets will be managed. It typically includes the purpose and scope of the policy, roles and responsibilities, investment objectives, spending policy, risk tolerance, asset allocation targets and ranges, rebalancing guidelines, investment guidelines and restrictions, manager selection and monitoring criteria, and a schedule for review. A clear IPS supports consistent decision-making, continuity as board members change, and demonstration of a prudent process.

Why Does a Nonprofit Need an Investment Policy Statement?

Board members and committee members serve as stewards of assets entrusted to the organization by donors and the community. State laws governing charitable funds, such as the Uniform Prudent Management of Institutional Funds Act (UPMIFA) adopted by most states, emphasize prudence in managing and investing institutional funds. An IPS is one of the most practical ways to document that process.

Nonprofit boards also change over time. A written policy provides continuity, helps orient new members, and reduces the risk that decisions shift with the composition of the committee or with short-term market conditions.

What Are the Key Sections of a Nonprofit IPS?

Purpose and Scope

Identify which funds the policy covers, such as an endowment, operating reserves, or board-designated funds, and the policy’s purpose. Different pools with different time horizons may warrant separate guidelines.

Roles and Responsibilities

Define the responsibilities of the board, investment committee, staff, investment consultant or outsourced chief investment officer, investment managers, and custodian. Clarity about who makes which decisions is central to good governance.

Investment Objectives

State the return objective, often expressed as preserving purchasing power after spending, inflation, and costs, and describe the time horizon. Objectives should be realistic and linked to the organization’s mission and spending needs.

Spending Policy

Describe how annual distributions are determined, or reference a separate spending policy. Our resource on spending policies for foundations and endowments discusses common approaches.

Risk Tolerance and Liquidity

Describe the level of volatility the organization can accept and its liquidity needs, including operating cash requirements and the ability to meet commitments to illiquid investments.

Asset Allocation

Establish target allocations and permissible ranges for each asset class. This is typically the most important driver of long-term results.

Rebalancing

Explain how and when the portfolio will be rebalanced toward targets.

Investment Guidelines and Restrictions

Set parameters such as diversification requirements, credit quality limits, permissible and prohibited investments, and any guidelines for alternative investments.

Mission-Aligned or Responsible Investing

If the organization wishes to align investments with its mission or values, the IPS should describe the approach, such as screening, thematic investments, or engagement, and how it will be implemented and evaluated.

Manager Selection and Monitoring

Describe criteria for selecting investment managers, benchmarks for evaluating them, and procedures for placing a manager on watch or terminating a relationship.

Reporting and Review

Specify the frequency and content of performance reports and how often the IPS itself will be reviewed, typically at least annually.

How Can Boards Keep the IPS Effective?

An IPS is useful only if it is followed and kept current. Effective boards review it annually, refer to it when making decisions, document deviations and the reasons for them, and update it when objectives, spending needs, or circumstances change. The document should be detailed enough to guide decisions but flexible enough to accommodate changing markets without constant revision.

Families can apply many of the same principles; our resource on investment policy statements for individuals and families explains how. Newport has also written about the role of asset allocation in long-term outcomes.

The Takeaway

A nonprofit investment policy statement translates mission and stewardship responsibilities into a clear framework for managing assets. Thoughtfully crafted and regularly reviewed, it helps boards act consistently and prudently across market cycles and leadership changes. Newport works with boards and investment committees on investment and spending policy development, mission-aligned investing, manager search and selection, and outsourced CIO services. Learn more about how we support foundations and endowments.

This article is provided for educational purposes only and is not individualized investment, tax, or legal advice. Please consult qualified professionals about your specific circumstances and review our disclosures.