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This Is What You Need To Know About The 9 Components Of A 401k Plan’s Investment Policy Statement

This Is What You Need To Know About The 9 Components Of A 401k Plan’s Investment Policy Statement
March 03
00:03 2020

The last thing on the minds of most corporate executives responsible for undertaking the duties as the firm’s 401k plan sponsor is the duties of a 401k plan sponsor. No. They wake up each morning and the first thing on their minds generally pertains to moving the business forward. That means paying attention to increasing revenues (that means marketing), broadening product lines (that means research), and keeping a tight ship when it comes to costs (that means operations).

None of that has any direct relationship to employee benefits like retirement plans. It’s not that employee benefits aren’t important. They are. It’s just that they represent a secondary priority. Business sustainability must always take precedent, for, without a company, there are no employees and there are no benefits.

When it comes to those benefits, however, plan sponsors greatly appreciate solid templates that have been proven over time. While there is no such thing as “one size fits all,” here’s a fairly generic template regarding the basic components of a 401k Investment Policy Statement (“IPS”).

#1: State the Objective of the IPS
This is fairly fundamental. It should explain, in plain English, the nature and purpose of an IPS (see “What is a 401k Investment Policy Statement?FiduciaryNews.com, November 26, 2019 and “What is the Primary Purpose of a 401k IPS?FiduciaryNews.com, January 7, 2020 for more details.) Here you should state the legal and regulatory framework under which you intend to operate (e.g., whether you seek ERISA 404(c) safe harbor protection), how the plan is consistent with broader corporate goals, and how you will measure, address, and monitor the various other components that follow. “A 401k IPS and an individual investor IPS are similar in that they both provide a roadmap as to how investments are going to be made to reach the intended objective,” says Barry Mione, CEO of SaveDay in Austin, Texas. “But, because a 401k greatly affects more than one person, a 401k IPS is often a way to ensure fiduciary protections.”

#2: A Statement of Corporate Mission
Here you state the company’s core values and beliefs, it’s purpose, and its broader mission. This is one of the most often overlooked portion of an ideal IPS. It can be a little confusing. “With respect to the relationship between a company’s strategic mission and its 401k plan IPS, that is a more complicated issue,” says Marcia Wagner of the Wagner Law Group in Boston, Massachusetts. “Plan sponsors had been focused upon the accumulation function of a 401k plan, but now are focusing more heavily upon the decumulation function of the IPS.”

#3: The Plan’s Mission Statement
Can the plan have a different mission statement than the company. It better. The company serves a broad array of constituencies, of which the employees represent only one. The plan, though, is to be operated in the sole interest of the employees. The primary mission will almost always be to provide tax deferred savings for company employees on order to allow them to save for retirement. This section should explain in general terms how the plan hopes to accomplish this mission. Details will be provided later on.

#4: A Summary of the Plan’s Vital Information
This includes all the mundane details of both the plan (e.g., type of plan, state of domicile, fiscal year end) as well as a listing of all the plan trustees and service providers. You’ll also want to include a plan demographic profile, especially if you plan to allow automatic opt-in features with a Qualified Default Investment Alternative (since QDIA’s are often based on an employee’s age). Finally, if there are any special circumstances such as risk or administrative issues, they should be stated in this section.

#5: An Outline of the Plan’s Investment Objectives
Now you’re getting into the nitty gritty of the IPS, but not necessarily in the manner you’ve been led to believe. Yes, at some point specific investments will be addressed, but first you need to make a general statement that ties the spectrum of investment objectives offered by the plan into the plan’s mission. At the very least, the plan will need to support practical objectives like Wealth Accumulation, Wealth Preservation, and Wealth Distribution. In addition to stating how QDIAs fit within this, you’ll want to identify a framework that maps investment objectives to specific Goal-Oriented Targets (see “How Does Goal-Oriented Targeting Work?FiduciaryNews.com, July 15, 2014) and available investment options.

#6: Method of Due Diligence and Evaluation
This is the section that outlines and discusses the specific criteria used to select investment options. Here you should also explain how selection criteria matches investment options and Goal-Oriented Targets. Furthermore, statements regarding non-standard critical parameters and policies regarding potential conflict-of-interest fees should also be included here. Finally, the fund evaluation methodology should describe the details of the plan’s Due Diligence Report (i.e., its frequency, who is responsible for preparing it, and its contents and objectives). This methodology “explains the metrics or standards that will trigger putting an investment on a watch list, as well as when an investment must be removed,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan.

 

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#7: The Trustee’s Fiduciary Education Plan
While many consider this an optional portion of the IPS, including it might qualify as a “best practice” because keeping the trustee’s informed and up-to-date regarding their ongoing fiduciary responsibilities helps reduce their personal liability and, ultimately, benefits the employee participants of the plan.

#8: The Plan Participant’s Education Plan
This is also considered an option portion of the IPS. It’s perhaps a bit more controversial than the trustee’s education plan because it involves employees and, should if be executed improperly, may subject the plan sponsor to a charge of providing investment advice. For this latter reason, documenting who is responsible, what the education program will look like, and the intended method of implementation all help reduce the plan sponsor’s potential fiduciary liability.

#9 Compliance Review Plan
The greatest liability associated with an IPS is the failure to carry out the promises documented in the IPS. When procedures become routine, they’re easier to carry out and, ironically, also easier to ignore. Each of the elements of the IPS should be regularly and thoroughly reviewed to ensure they are both updated and documented.

An IPS must be thoroughly documented and clearly written and understood by all interested parties. The procedures should be written in a manner that allows flexibility so they can be implemented in a practical way. To ignore them because “they can’t be done” is not only a sign of a poorly constructed IPS, but also a warning the plan may be vulnerable to charges of non-compliance. Lastly, frequent reviews will give the document greater – and proper – relevance to the plan’s trustees.

“There is high turnover in committee members on the 401k side so the IPS becomes a true living document that survives generations of committee members,” says Greg Patterson, CEO of The Advisory Group in San Francisco, California. “This is essential for the continuation of the institutional knowledge.”

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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