Does your 401(k) plan have an updated investment policy statement? Although plan sponsors aren’t required by law to have one, the IPS is one of the primary documents the Internal Revenue Service and Department of Labor request when they visit employers for plan audits.

Here are the basics of what should be included in an employer’s 401(k) plan IPS:

Intention to comply with ERISA section 404(c)

A properly constructed IPS will list the criteria necessary to comply with the safe harbor provisions of ERISA section 404(c) and state the intention of the plan to comply with it. Having an ERISA section 404(c) compliant 401(k) plan shields the plan sponsor from lawsuits brought by participants for losses on investments in the plan.

Eligible investments

An IPS should outline the investments that the investment committee believes are appropriate for the 401(k) plan. This may include investment options like target date funds and collective investment trust funds. Also likely to be included are all nine combinations of large-, mid- and small-capitalization mutual funds spread across the value, blend and growth spectrum.

The Internal Revenue Service headquarters in Washington, D.C.

Prohibited investments

An IPS should also list those investments that are not permitted in the 401(k) plan. Typically excluded are investments in any real property (gold, real estate, collectibles, etc.) along with individual stocks, commodities (real or futures), private equity and non-publicly traded stock.

Roles and responsibilities

It’s important for the IPS to outline the roles and responsibilities of the investment committee, custodian, investment consultant and investment manager. Not sure what your investment committee should be doing during your meetings? Take a look at your IPS.

Investment option selection criteria

Process is the key to effective fiduciary compliance. A sound investment option selection process outlined in the IPS serves as a guide to helping the investment committee make good investment decisions.

Investment option monitoring process

An important role the investment committee plays is monitoring the investment fund menu for the plan. The IPS should outline how that process will work. Employers can rely on their investment adviser to provide them with the reports and information they need to effectively monitor their investment menu.

Investment option replacement criteria

Sometimes it’s necessary to replace a poor-performing or inappropriate investment option. Every IPS should outline the criteria for placing an investment option on the “watch list” and also the process for removing or replacing an investment option.

Don’t have a plan IPS? A lot of nice samples can be found on the internet. And for those working with an investment adviser, he/she should be providing an IPS as part of the service package. Since the investment business is dynamic, it’s reasonable to expect an investment adviser to review the IPS annually and update it every other year.

There is only one thing worse than not having an IPS — having one and not following it. There has been significant litigation against plan sponsors who haven’t followed their IPS and strayed into investments that weren’t allowed. Plan sponsors should be able to rely upon their investment adviser to keep them in compliance with an IPS. However, this is an area that should be trusted and verified. If an adviser leads a plan sponsor astray, they still have fiduciary responsibility for the investments in the 401(k) fund lineup.

An IPS is a key part of a plan sponsor’s fiduciary compliance process. Employers should a look at their IPS today and make sure it is up-to-date.
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Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC, a RIA firm helping 401(k) plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.

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