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You don't have to have an Investment Policy Statement for your 401(k) plan. It's a blade that can cut both ways. Written well, an IPS offers a template to easily protect both the plan sponsor and the plan participant. Written poorly, it exposes the plan sponsor to unnecessary liabilities.
Whether the IPS is crafted well or poorly will depend on who's doing the crafting – and who's not, (see "Who Is Generally Responsible For Designing, Detailing, And Approving The 401k IPS?" FiduciaryNews.com, January 30, 2020).
Let's focus on trying to avoid those unnecessary liabilities. This is perhaps the greatest unforced error when it comes to a 401(k) IPS. It's too easy to treat the exercise of creating an IPS as a statement of elegance, not pragmatism. This is how plan sponsors expose themselves.
OK, to make sure this doesn't happen, you need a lot of experts. This is one case where too many chefs won't spoil the pot. Who are these chefs and what should you expect from them?
Most will immediately cite the investment adviser as the head chef. The problem arises when this provider acts as the only chef.
Since the investment adviser will be placed in the position to continually monitor and assess plan investment options, the IPS usually defines a due diligence process familiar to the adviser. But it's the plan sponsor who's often left holding the bag if the adviser cuts a corner (or, worse, drops the ball) at any point in this process.
This means that the process defined in the IPS must be one which the plan sponsor can easily oversee. To insure this, the plan sponsor needs to put on a chef's hat when it comes to what the IPS says. If the investment reporting jargon leaves the plan sponsor too dependent on the adviser's expertise in translating it, that jargon probably should be removed or amended.
The IPS must be written in the language of the plan sponsor, not the service provider.
If you're paying attention, you can guess how this concept might be extrapolated. This extrapolation gives you an idea of who else might be involved in the IPS review process.
Remember, when it comes down to it, the IPS is nothing more than a set of procedures. The plan sponsor, either directly or indirectly through third parties, makes a promise that these procedures will be followed.
To the extent these procedures involve third parties, they will need to agree to them. If you want these service providers to agree, you'll need them at the table when the IPS is being drafted.
This would therefore necessitate the recordkeeper (and possibly the payroll processing agent) being involved because the IPS describes the flow of participant funds into and out of investments. In addition, the IPS may also describe how those investments are regularly monitored, and that should be reflected in how that same information is supplied to the participant.
The recordkeeper will usually provide employees the gateway to access their 401(k) account. This gateway should be consistent with what the IPS promises. If the recordkeeper is not part of the IPS creation process, the risk is it may not be. The plan sponsor, however, is likely to be held accountable for this.
Which leaves us with one last chef – the plan's ERISA attorney. Now, I'm not an attorney, so I can't tell you the legal ramifications of the language used in the IPS. The ERISA attorney can.
And you should heed that advice.
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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).
