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When Do 401k Plan Sponsors Usually Adopt an Investment Policy Statement?

When Do 401k Plan Sponsors Usually Adopt an Investment Policy Statement?
February 04
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).

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), and you’ve identified who should be tasked with putting the IPS together (“Who Is Generally Responsible For Designing, Detailing, And Approving The 401k IPS?” January 28, 2020), you’ve crafted the document so the question remains as to when you should adopt it.

An IPS is not a required document, but it can be very helpful (and, if you’ve been paying attention, very dangerous). It can act as a guide that illuminates the pathway to maintaining a “best practices” 401k plan. It can also act as a rope that can hang a plan sponsor.

After the decision to create an IPS, 401k plan sponsors next want to know when is the appropriate time to adopt the document. “The IPS is adopted when the 401k plan is started,” says Matt Ahrens, Chief Investment Officer at Integrity Advisory, LLC in Overland Park, Kansas, “but it needs to be reviewed annually along with proposed fund changes.”

While this might be a “best practices” model, there is no hard and fast rule when the IPS should be adopted. “Optimally, an IPS would be adopted when the plan is initially put in place,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan, “but it could be adopted at any time and often if one is not in place it could be adopted at the annual investment committee plan review.”

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Regardless of when it’s adopted, it is something that needs to be thoroughly scrutinized by all relevant parties well in advance of adoption. “A plan sponsor usually adopts a 401k IPS when signing up for a new 401k plan,” says Barry Mione, CEO of SaveDay in Austin, Texas. “Of course, the 401k IPS should be made available before signing up in order to see how an investment portfolio is managed.”

Not only can plan sponsors be flexible in terms of initially adopting the plan, but there’s also a broad range of times and events when the IPS should be updated. “It can be adopted at any time and reviewed several times a year for any adjustments to make sure the investment provider is adhering to it,” says Deborah A. Castellani, Sr. Fiduciary Strategist/Principal at Akros Fiduciary Management in Austin, Texas. “It should then be voted on each year.”

If the IPS is written well, it will need less frequent examinations. “It should be reviewed every three to five years unless there are more frequent material changes,” says Dr. Guy Baker, founder of Wealth Teams Alliance in Irvine, California.

The Investment Policy Statement is a legal plan document. It needs to be treated accordingly. This means to deliberate it with diligence before adopting it, and then only adopting it if the plan sponsor is certain it doesn’t contain any instructions that might trip up the plan sponsor. Even when it is adopted, it must be regularly inspected and revised as needed.

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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