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What is a 401k Investment Policy Statement (IPS)?

What is a 401k Investment Policy Statement (IPS)?
November 26
00:03 2019

It’s not required by law, but it has become a best practice. And there’s a good reason for this. The 401k Investment Policy Statement (“IPS”) offers plan sponsors an avenue for safety, but only if they’re careful.

What is a 401k IPS? What’s is supposed to do? If it’s not required, why are we talking about it?

This is the first in a series of articles designed to answer the basic questions 401k plan sponsors have concerning investment policy statements. We start with the most basic of all questions: “What is a 401k IPS?”

“A 401k IPS is a formal written document where plan sponsors outline the objectives of their company retirement plan, the process for selecting and monitoring investments, and the roles and responsibilities of all parties involved,” says Greg Patterson, CEO of The Advisory Group in San Francisco, California.

You might want to liken this to any other strategic document created by the company. “Think of it as a business plan for 401k fiduciaries,” says Barry Mione, CEO of SaveDay in Austin, Texas.

It can (and should be) a detailed document that sets forth the due diligence procedures the plan sponsor will follow regarding the selection and monitoring of investments. In doing this, the IPS creates a template for ongoing reporting; thus, providing valuable evidence that plan sponsors have abided by their fiduciary duty.

“An IPS is a codified document created by the plan sponsor (employer) with the guidelines and parameters included on what and how the plan sponsor investment committee chooses which investment funds will be included in the fund lineup for the 401k plan in which employees can choose,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan. “This ensures that there is a written document with procedures in place to satisfy the plan sponsor duty to choose the best available options for the employees based on factors including, but not limited to, fund performance, expense ratio, manager tenure, fund assets, etc. Having one in place demonstrates that a prudent process has been followed with plan investments.”

While the 401k IPS is now generally considered a best practice, it’s not a legal requirement. In fact, it’s taken some time to reach the level of acceptance it enjoys today.

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While it has been revised and updated several times since then, the DOL originally issued its “Interpretive bulletin relating to written statements of investment policy, including proxy voting policy or guidelines” in July of 1994. Known as “IB 94-2,” it was meant to address certain questions then being posed by plan sponsors in relation to the safe harbor provisions pertaining to 401k plans.

“The DOL’s statement in IB 94-2 that an IPS is consistent with a fiduciary’s prudence and diversity requirements was an impetus,” says Marcia Wagner of the Wagner Law Group in Boston, Massachusetts. “As the structure of 401k plans has evolved, the need for an IPS became more apparent. When the 404(c) regulations were issued in 1992, many plan sponsors were only offering 3 investment alternatives, and were inquiring whether a stock fund, a bond fund, and a money market fund satisfied 404(c).”

Since those early days, the 401k menu has only gotten more complicated. “Today the typical plan offers several more alternatives, so there are more investment options to oversee,” says Wagner. “An IPS should be reviewed annually to determine if any modifications are necessary.”

As the tort bar rose to expose the liability of plan sponsors, the need for the protection afforded by an IPS became more apparent. Wagner says, “With the filing of lawsuits against large 401k plan sponsors, other plan sponsors realized they needed to pay more attention to their fiduciary responsibilities, and one such measure would be adopting and following an IPS. New issues also arise, such as the extent to which ESG should be taken into account.”

Although we’ve seen a broader acceptance of using an IPS, their use is by no means universal and particularly lacking among smaller employers. “Clearly, the percentage of plans adopting an IPS has increased over the past twenty years, and the percentage increase would be higher except for the comparatively low percentage of small plans with IPS,” says Wagner. “I suspect the reason for their reluctance is avoidance of another expense or it will require a time and energy commitment on their part that they are unwilling to make.”

Perhaps there’s a realization that, if you don’t get the IPS right, you’ll only increase your liability. The IPS outlines what “i’s” you need to dot and what “t’s” you need to cross. It’s the first thing the DOL will ask for and it’s the first thing they’ll cite if a plan sponsor fails to document how the procedures described in the IPS have been implemented.

Still, the IPS remains the backbone of many 401k plans. It offers a compliance blueprint not just for plan sponsors, but for the service providers they hire.

“The 401k IPS is the document that drives the plan’s investment strategy,” says Matt Ahrens, Chief Investment Officer at Integrity Advisory, LLC in Overland Park, Kansas. “It should specifically outline how investments were selected, why they were selected, and how they will be monitored going forward. It will also specify the duties and responsibilities for all of the parties involved such as the plan sponsor, investment advisor, etc.”

Next, we’ll tackle the question as to why a plan sponsor should (or should not) adopt a 401k IPS.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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