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There's that old saying "You can't see the forest for the trees." While the trees may prevent you from seeing the big picture, it's the weeds that trip you. The devil is in the details when it comes to a 401(k) investment policy statement (IPS). Those details are like weeds. Not only can they grow prolifically, but they can be the very thing that trips you up.
Before getting into the weeds of the IPS, it's critical you go beyond them, indeed, well beyond even the trees. Picture your IPS as a vast forest, an ecosystem that expresses the interconnectedness of your 401(k) and guides it to its ultimate goal (see "5 Critical Elements Every 401(k) IPS Must Contain to Achieve Its Primary Purpose," FiduciaryNews.com, January 14, 2020).
Before you write the first word of your IPS, you first need to identify your strategy. This represents the backbone of your IPS – a stack of essential vertebrae from which spring the details of the rib cage.
To identify this strategy, you must know your strategic objective. That's the primary purpose of the plan. As we've stated earlier, the plan's primary purpose is to protect and serve. It must protect the best interests of both the plan sponsor and the plan participants.
Only by doing this can the 401(k) best serve the two parties. For plan sponsors, it means happy (and productive) employees. For plan participants, it means one less thing in life to worry about.
What's the difference between the strategy and the tactics found within a 401(k) IPS?
The best way to answer this is through an example. We'll use a very broad example. Let's consider a favorite of many: benchmarking.
Benchmarking has become a mainstay topic for plan sponsors. It allows them to continually monitor, assess, and take action regarding plan policies and providers. How is this achieved?
It's tempting to focus immediately on tactics. That is, to identify and collect data in popular information silos. For example, when it comes to investments, the silo may be performance. When it comes to plan policy, the silo may be participation percentage. When it comes to plan effectiveness, the silo may be average deferral percentage. When it comes to plan achievement, the silo may be average participant account size.
You get the picture. Everything is neat and measurable. But is it meaningful?
You won't know the answer to that question if you don't have a strategy that answers the question: Why are we benchmarking in the first place? And, in the end, the answer to that question must go back to the primary purpose of the 401(k) IPS.
In other words, the answer should be: "We are benchmarking to improve the ability of the plan to protect and serve its corporate constituents."
What does this imply?
First, the benchmarks chosen must offer consistent and reliable data. Second, the benchmark comparatives much specify the movement objective.
To focus just on the case of investments, are you looking for raw performance, relative performance, and, in either case, over what time periods? Are you even measuring performance properly? Are you unknowingly systemizing poor decision-making processes exposed by behavioral finance research?
You see where this is headed. That's why it's critical you lay out the strategy of your 401(k) IPS before you get down to the brass tacks of tactics.
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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).
