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Who Is Generally Responsible For Designing, Detailing, And Approving The 401k IPS?

Who Is Generally Responsible For Designing, Detailing, And Approving The 401k IPS?
January 28
00:03 2020

Now that you know what a 401k Investment Policy Statement (“IPS”) is (“What is a 401k Investment Policy Statement?FiduciaryNews.com, November 26, 2019), you’ve decided you should have one (“Should a Plan Sponsor Adopt a 401k Investment Policy Statement?FiduciaryNews.com, 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?FiduciaryNews.com, January 7, 2020), and you’ve identified the ways a 401k IPS can achieve that primary purpose (“5 Critical Elements Every 401k IPS Must Contain to Achieve Its Primary Purpose,” January 14, 2020), the question is who should be tasked with putting the IPS together?

In order to fulfill its function, the IPS ideally brings together many variegated elements. This includes everything from the broad strategic vision of the company, to the actual mechanics of the plan, to the specifics of dealing with the plan investments.

Each of these areas can feature different specialists, including company insiders as well as plan vendors. In the end, however, it is the duty of plan sponsor to vote up or down on the IPS. “The plan sponsor has the ultimate responsibility for designing, detailing, and approving the 401k IPS,” says Greg Patterson, CEO of The Advisory Group in San Francisco, California, “but the IPS is often done with guidance from an adviser, ERISA attorney, or other (ideally aligned/conflict-of-interest-free) service provider.”

Since the bulk of the IPS addresses investment concerns, plan sponsors often rely on vendors hired for that purpose. “Generally the financial advisor on the plan will design and detail the IPS, but the plan sponsor needs to review and approve it,” Matt Ahrens, Chief Investment Officer at Integrity Advisory, LLC in Overland Park, Kansas. “Often the plan’s Recordkeeper will provide a generic IPS that gives great leeway to the plan in selecting investments, and deciding when an investment needs to be replaced.”

There are many different types of plans. These will require different types of service providers, particularly if these third parties operate as 3(21) or 3(38) advisers (see “What Do Most 401k Plan Sponsors Use: a 3(38) or a 3(21) Adviser?FiduciaryNews.com, August 20, 2019). Which vendor arrangement a plan sponsor chooses impacts how the IPS will be constructed – and how the relevant parties contribute to that draft.

“Either the plan sponsor investment committee (with the assistance of a 3(21) adviser, if one is engaged, or the investment manager, if this responsibility is delegated to an ERISA 3(38) ‘investment manager,’” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan.

The difference arises because of the differing nature of duties between a 3(21) and a 3(38) adviser. A 3(21) works more collaboratively with the plan sponsor. On the other hand, a 3(38) must have full discretion in order for the plan sponsor to take full advantage of the fiduciary liability mitigation offered through hiring a 3(38).

You can imagine how this changes the process of creating a 401k IPS.

“If the plan hires a 3(38), the investment manager takes the lead and creates the document with the help of the investment committee,” says Deborah A. Castellani, Sr. Fiduciary Strategist/Principal at Akros Fiduciary Management in Austin, Texas. “If the plan hires a 3(21), the investment committee is mostly involved with putting together the IPS with the help of the investment adviser. Generally speaking, if the plan hires an adviser with no fiduciary status, then the investment committee must put the IPS together with minimal help from the advisor.”

Once the language of the document is finalized, the plan sponsor will need to formally adopt the IPS. Next time we’ll explore when this usually takes place.

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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