The 40(1)k investment policy statement represents the first line of defense for plan sponsors. (Photo: Shutterstock)
Long, long ago in a far distant time (the 1980s), 401(k) plans were the plain-vanilla offspring of profit-sharing plans. In those days, before the great mutual fund confiscation of the retirement plan industry, 401(k) plans were simple creatures.
But to paraphrase Bob Dylan: "The times they have a-changed."
In the ensuing decades, the 401(k) grew more complex. What once was a single kitten confined to a small cardboard box became a rambunctious herd of cats. Good luck with that.
With all these interconnected parts whizzing around like so many electrons randomly orbiting an expanding atom, is it any wonder ERISA experts see how an Investment Policy Statement ("IPS") can help (see "What is a 401(k) Investment Policy Statement (IPS)?" FiduciaryNews.com, November 26, 2019).
From the point of view of the plan sponsor, the 401(k) IPS represents the first line of defense. It clearly spells out the nature and intent of the plan, as well as the structured procedures designed to implement that nature and intent. This can save many a plan sponsor's neck.
Really. It's all about dotting the i's and crossing the t's. All a plan sponsor need do is follow the instructions.
More precisely, all the plan sponsor needs to do is to make sure the service providers follow the instructions of the 401(k) IPS. For it is the service providers that have the greatest command of all those swirling electrons.
And who exactly are those poised to discover a misplaced electron at the peril of plan sponsors? Why, none other than your friendly neighborhood regulators (and perhaps a tort attorney or two).
A lot of things can go wrong in a 401(k) plan. That's to be expected. Modern 401(k) plans are just too big for things not to go wrong.
It's really nothing to worry about.
As long as you're doing what the IPS said, there's a lot wiggle room for forgiveness.
Of course, this wiggle room works both ways – and that's why some are leery of 401(k) Investment Policy Statements. If you drop the ball in any way, you've got liability exposure.
In a sense, the IPS itself becomes just another one of those electrons.
In this case, however, the trajectory is less random. Failure to abide by the IPS is merely an example of sloppiness. It either can be sloppy wording in the original plan or sloppy execution. Either way, it's controllable.
When it comes down to it, though, a 401(k) Investment Policy Statement has never been more important for a plan sponsor to create, maintain, and follow.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
