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What is the Primary Purpose of a 401k IPS?

What is the Primary Purpose of a 401k IPS?
January 07
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), and you’ve decided you should have one (“Should a Plan Sponsor Adopt a 401k Investment Policy Statement?, December 2, 2019), you need to familiarize yourself with the primary purpose of a 401k IPS.

Fortunately, this is a relatively straight-forward task.

“The IPS’s main purpose is to protect the participants of a 401k plan,” says Matt Ahrens, Chief Investment Officer at Integrity Advisory, LLC in Overland Park, Kansas. As with all things fiduciary, the primary purpose of such a role is to protect the best interests of the relevant beneficiaries. In the case of a 401k, that would be the plan participants.

However, the IPS also protects another important party to the 401k plan. “It safeguards the trustees of the plan from being seen as arbitrary,” says Dr. Guy Baker, founder of Wealth Teams Alliance in Irvine, California, Texas.

While the IPS can and does cover any number of plan related issues, it focuses on one in particular, as its name suggests. Barry Mione, CEO of SaveDay in Austin, Texas, says, “The primary purpose of a 401k IPS is that it describes the driving philosophy of the investment portfolio, which the adviser is making on behalf of their clients, and how it may or may not change in the future.”

The IPS accomplished this by “establishing guidelines for selecting and monitoring plan investments while providing a framework for making critical fiduciary decisions,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan.

Unlike a generic vendor agreement, the IPS is a formal plan policy document that defines the parameters between the plan and relevant vendors. “It sets in writing what is expected of the investment adviser and gives the plan sponsor an oversight method of helping to make sure the adviser is carrying out their wishes,” says Deborah A. Castellani, Sr. Fiduciary Strategist/Principal at Akros Fiduciary Management in Austin, Texas.

“It informs the 3(38) fiduciary how to manage the assets in the plan – especially benchmarking the plan,” says Baker. “It is a document that spells out the allowable asset classes and the range of expenses the trustee is willing to accept for the plan. It also defines the benchmarking methodology and how to replace funds.”

Herein lies the potential trap for the plan sponsor who carelessly adopts an IPS. It can establish a system of specific procedures that, if not precisely followed, may actually increase fiduciary liability.

“The primary advantage of an IPS is in providing a clear road map of the objectives of the 401k plan, and the manner in which those objectives are to be achieved,” says Marcia Wagner of the Wagner Law Group in Boston, Massachusetts. “Problems can arise if the IPS is drafted too strictly, which could result in an inadvertent violation, or if its terms are not followed.”

It’s one thing to know the primary purpose of a 401k IPS, it’s quite another thing to know how best to achieve that purpose.

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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