Are you impressed by reams of due diligence reports? Do they imply a significant volume of work and effort? Does the size justify the fee?
If your answers to any of these questions are "yes," be careful. Your eye might be off the ball. You might be more concerned with process, rather than results.
And it's results that matter most.
When considering whether to adopt an Investment Policy Statement (IPS) for your 401(k) plan, it's necessary to keep in mind why IPSs exist in the first place, (see "What is the Primary Purpose of a 401k IPS?" FiduciaryNews.com, January 7, 2020).
A 401(k) IPS can contain a lot of material. After all, it creates the system by which the 401(k) plan operates. But it should be written more like a series of guidelines, not as a set of standard operating procedures.
By avoiding detail, the plan sponsor avoids needlessly slipping on the banana of omission. Even if it makes sense, it may be dangerous to include extraneous steps. It's not required and it's just too easy to accidentally forget to fulfill them. That can get a plan sponsor in a heap of trouble.
And getting in a heap of trouble is not the purpose of a 401(k) IPS.
A 401(k) IPS needs to, above all else, protect. It needs to protect the interests of plan participants. It also needs to protect the plan sponsor. A well crafted IPS accomplishes this through words precise enough to protect, but broad enough to allow some discretion.
It's this latter requirement that proves the toughest. Often immersed in a world of ISO 9000, plan sponsors can mistaken view a 401(k) IPS as just another tool for quality management and quality assurance.
There's a big difference between the allowance for contingency found in other businesses and the restrictive compliance boundaries of regulated retirement plans. Indeed, for example, engineers will incorporate a certain amount of "tolerance" in their calculations.
This allows engineers to make sure the perfect is not the enemy of the good. A bridge that is engineered too rigidly will snap (rather than sway) at the first unusually high gust. Yet, the formulae used in building this bridge are as precise as can be. It's just that engineers are allowed to build in a tolerance for situations that are imprecise.
Perhaps plan sponsors, at least those who are engineers, will better understand how to approach their 401(k) plan's IPS. Yes, the guidelines can focus on an ideal, but the IPS document itself must allow for a similar tolerance.
Because if plan sponsors are too worried the IPS is more of a liability than a protection, it will be more difficult for them to use it to protect plan participants.
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