7 Items in Every 401k Plan’s Investment Policy Statement

'Significant litigation' against plan sponsors who haven't followed the IPS

401k, IPS, retirementWatch out for an improperly executed IPS.

Do your clients’ 401k plans have updated Investment Policy Statements? Although not required by law, the IPS is one of the primary documents the IRS and Department of Labor request when they conduct plan audits.

Here are the basics to be included in every 401k plan’s IPS:

  1. Intention to comply with ERISA section 404(c)

A properly constructed IPS will list the criteria necessary to comply with the safe harbor provisions of ERISA section 404(c) and state the intention of the plan to comply with it. Having an ERISA section 404(c) compliant 401k plan shields the plan sponsor from lawsuits brought by participants for losses on investments in the plan.

  1. Eligible investments

An IPS should outline the investments that the investment committee believes are appropriate for your 401k plan. This may include investment options like target date funds and collective investment trust funds. Also likely to be included are all nine combinations of large-, mid- and small-capitalization mutual funds spread across the value, blend and growth spectrum.

  1. Prohibited investments

The IPS should also list those investments that are not permitted in a 401k plan. Typically excluded are investments in any real property (gold, real estate, collectibles, etc.) along with individual stocks, commodities (real or futures), private equity and non-publicly traded stock.

  1. Roles and responsibilities

It is important for the IPS to outline the roles and responsibilities of the investment committee, custodian, investment consultant and investment manager. Not sure what the investment committee should be doing during its meetings? Take a look at the IPS.

  1. Investment option selection criteria

Process is the key to effective fiduciary compliance. A sound investment option selection process outlined in the IPS serves as a guide to helping the investment committee make good investment decisions.

  1. Investment option monitoring process

An important role an investment committee plays is monitoring the investment fund menu for the plan. The IPS should outline how that process will work. The investment advisor should provide reports and information needed to effectively monitor the investment menu. 

  1. Investment option replacement criteria

Sometimes it’s necessary to replace a poor-performing or inappropriate investment option. Every IPS should outline the criteria for placing an investment option on the “watch list” and also the process for removing or replacing an investment option.

Don’t have an IPS for a plan? There are many samples online. Every investment adviser should provide an IPS as part of the service package offered. Since the investment business is dynamic, it’s reasonable to expect an investment advisor will review an IPS annually and update it every other year.

There is only one thing worse than not having an IPS—having one and not following it.

There’s significant litigation against retirement plan sponsors who haven’t followed their IPS, those that strayed into investments that weren’t allowed. The advisor should keep the sponsor in compliance.

An IPS is a key part of a fiduciary compliance process. Take a look at the plan’s IPS to make sure it’s up-to-date.

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Lawton is an award-winning 401k investment adviser with over 30 years of experience. Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to 401k plan sponsors. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at http://www.lawtonrpc.com.

1 Comment on "7 Items in Every 401k Plan’s Investment Policy Statement"

  1. A very good article. The only item I would question is the line about excluded investments. I would argue that you should always have a real estate fund in your plan. Stressing that the allocation should be low, and to keep it low in any adviser managed models. But I believe it should be an available option.

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