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It's a classic tale from Hollywood westerns. Two gunfighters stand off against each other under the heat of the high noon sun. Beads of sweat pool on their foreheads above their squinting eyes. Their rough hands dangle dangerously by their sides.
Who will win the draw?
The quick one?
Or the accurate one?
There's a lesson to learn from these tales that often see the quick dispatched by the victorious accurate. Plan sponsors should keep this in mind when they consider adopting a 401(k) Investment Policy Statement (see "When Do 401k Plan Sponsors Usually Adopt an Investment Policy Statement?" FiduciaryNews.com, February 6, 2020).
Now, I'm going to say something that will rankle a few feathers.
I'm not sold that you need to adopt an Investment Policy Statement when the plan starts.
Don't get me wrong. If it were my 401(k) plan, I'd have no problem with immediately adopting an IPS. I've had a hand in writing enough of them that I'm totally comfortable going from zero to 60 when it comes to an IPS.
Most plan sponsors, on the other hand, don't have decades of hands-on experience with retirement plans. Asking them to adopt an IPS before the plan accepts its first contributions is like asking someone to jump into the deep end before taking swimming lessons.
Why not wade in? No one is keeping time on a stopwatch to see how fast you can adopt an IPS. There simply no rush to do it.
And what's the danger of placing speed ahead of accuracy?
Investment Policy Statements can be very unforgiving. Worse, what works well for one plan sponsor might be disastrous for another.
This is because an IPS is a legal document. It's a promise the plan sponsor makes to plan participants. And it's enforced by regulators. And a breach of that promise exposes the plan sponsor to a liability they could have easily avoided.
So, here's the deal. Rather than taking a dive into the deep end all at once, plan sponsors should dip their toes in first to get a feel for the water's temperature. Then, after a bit of time wading into the shallow end of 401(k) plan operations, perhaps then plan sponsors might be comfortable enough to test the deep end.
This practical experience is important. It instructs plan sponsors as to the limits of their capabilities. Knowing these limits allows plan sponsors to make sure their IPS is worded in a way that keeps their obligations within those natural limits.
They won't learn these limits, though, unless they test drive their 401(k) plan for some certain amount of time.
That's why it doesn't make sense to always adopt an IPS when the plan is new. The plan sponsor needs to settle into a groove first. Get used to all the procedures. Know what it means to make a commitment to those procedures.
Only then can plan sponsors sign the dotted line.
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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).
