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5 Critical Elements Every 401k IPS Must Contain to Achieve Its Primary Purpose

5 Critical Elements Every 401k IPS Must Contain to Achieve Its Primary Purpose
January 14
00:03 2020

Now that you know what a 401k Investment Policy Statement (“IPS”) is (“What is a 401k Investment Policy Statement?, November 26, 2019), you’ve decided you should have one (“Should a Plan Sponsor Adopt a 401k Investment Policy Statement?, December 2, 2019), and you’ve familiarized yourself with the primary purpose of a 401k IPS (“What is the Primary Purpose of a 401k IPS?, January 7, 2020), you must identify the ways a 401k IPS can achieve that primary purpose.

A 401k IPS can be as complex or as simple as the plan sponsor desires. It can be five pages or 50 pages. No matter the length or its intricacy, a 401k IPS must contain the following five critical elements. Each element addresses, supports, and sustains the primary purpose of a 401k IPS: the long-term protection and ultimate success of plan participants.

The ideal 401k IPS achieves this objective by:

#1: Defining Clearly Roles
First and foremost, you can’t tell the players without a scorecard. A 401k is not a one-man show. There are a lot of moving parts and a lot of people manning those moving parts. Each of those people has a specific role to play and are tasked with specific duties.

“The 401k IPS achieves its purpose by clearly outlining the responsibilities of the different parties involved with designing policy or implementing policy so everyone involved can make decisions with the same guiding framework,” says Greg Patterson, CEO of The Advisory Group in San Francisco, California.

#2: Articulating Change Parameters
You can never step twice into the same river. While this sounds odd, it nonetheless contains a deep truth. A river’s current moves constantly. It’s continually changing. As a result, it’s never the same river.

The same concept holds with a 401k plan. The currents of the regulatory and investment environments intertwined within retirement plans are themselves subject to change. Plan must therefore anticipate these changes and a 401k IPS sets the parameters which bound these expected changes. These articulated rules guide the relevant service providers.

“The 401k IPS achieves its purpose by holding the advisor responsible for the investment portfolio and how it is managed,” says Barry Mione, CEO of SaveDay in Austin, Texas. “If the advisor makes changes to the investment portfolio, those changes must be consistent with the 401k IPS and offer explanations that coincide with the IPS.”

#3: Scheduling Periodic Due Diligence Reviews
The best method to monitor multiple ever-changing environments is by establishing period reviews to look at all those aforementioned moving parts. It helps to also have a standard agenda. In effect, the 401k IPS represents a living document that should adapt to new circumstances.

“It is a written document which should be reviewed at least a few times a year with the investment provider and the investment committee should approve it at least once a year,” says Deborah A. Castellani, Sr. Fiduciary Strategist/Principal at Akros Fiduciary Management in Austin, Texas. “It gives a simple way to compare the investments to what was agreed upon when the IPS was written. The IPS can be changed and reviewing periodically ‘forces’ the plan committee to consider all aspects of investments and how their investment providers are performing.”

#4: Identifying Consistent Benchmarks
Reviews, though scheduled, are only worth that which they are measured by. A 401k IPS must definitively spell out what specific benchmarks its various parts will be measured by. No where is this more true than the plan’s investment menu. “A 401k IPS achieves its purpose by spelling out the guidelines for benchmarking and eliminating or changing funds,” says Dr. Guy Baker, founder of Wealth Teams Alliance in Irvine, California.

#5: Systemizing Liability Protections
The first four elements offer the basis for the fifth. This is the umbrella that keeps the guardian of the plan – the plan sponsor – happy and safe. It’s also the part of the plan most likely to trip up a plan sponsor in terms of liability. This is the part that needs to be crafted carefully so as to no expose the plan sponsor to undue liability.

“Besides establishing guidelines for selecting and monitoring plan investments,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan, “an IPS also gives plan sponsors and other fiduciaries liability protections on participant-directed retirement plans, like a 401k, if the plan satisfies the regulation’s conditions.”

By including and addressing all five of these elements, a 401k IPS will be well on its way to achieving its safeguarding plan participants and make it more likely they will retire in comfort.

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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