Does your 401(k) plan have an investment policy statement (“IPS”)? According to Callan consultants, some 90% of defined contribution plans maintain an IPS. Historically, however, larger plans are more are far more likely to develop the document than smaller retirement plans.
But not every plan that has an IPS keeps it close at hand. Fewer than two-thirds of plans have reviewed their investment policy statements in the last 12 months.
The investment policy statement is a document describing criteria for your company’s retirement plan investments and their ongoing evaluation. Ideally, while this document will provide appropriate policies for investment selection and monitoring, it will avoid specifics that then can limit the committee’s discretion, or force them into a decision. The IPS should serve as a roadmap, but not provide the committee with turn by turn directions.
A solid investment policy statement defines the role of the investment committee, and provides guidance on what investments should be included in the plan. The statement should describe the plan’s investment philosophy and provide general guidance on how the fund menu should be constructed. For example, should the committee merely be given instructions to include equity, fixed income, and money market funds? Or should they also be instructed to consider equity funds of various investment styles?
The investment committee’s job is far from over once it selects the investments. That’s why the IPS should describe how the investment committee should monitor the fund line-up, and it should instruct them about circumstances that could be cause for removing a fund from the plan.
A roadmap for selecting 401(k) investments helps keep the plan’s offerings consistent. And well-defined criteria for regularly evaluating the investments ensures that the fund managers are investing the plan’s assets in a manner consistent with your expectations.
Once in place, a 401(k) investment policy statement can provide evidence that the plan sponsor is dutifully acting as a fiduciary when it comes to overseeing the plan’s investments. This can be critical information for your auditor, or even the Department of Labor.
Once you have this document put together you should follow it. Remember you are a fiduciary to your employees (some might say an employee fiduciary) when you offer a defined contribution plan as a benefit. Violations of the policy can be considered a fiduciary breach.
That’s all the more reason to take care that your IPS does not prevent the committee from taking an action they deem appropriate, or force them into an action they might not otherwise take.
At ForUsAll, we know the Department of Labor doesn’t require an investment policy statement. But it does require that plan sponsors offer prudent investment options, and regularly assess your funds’ performance and appropriateness for the plan’s participants.
That’s why we think it is critical for prudent investment fiduciaries to establish an IPS for the plan, stating the underlying principles on how the plan investments will be chosen and reviewed. Any fund options that are no longer prudent should be removed from the fund lineup. This should be done regularly to provide appropriate investment selections and reduce legal liability. Since DOL audits do happen, the fiduciary needs to regularly review and carefully document the process and decisions related to the investments in the plan.
Unless your company has hired a 401(k) advisor who is acting as a 3(38) fiduciary, the role of the fiduciary rests on your company’s shoulders. A strong retirement plan advisor, with real experience working with defined contribution plans, can really help remove this workload from your team’s shoulders.
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