Does your 401(k) plan have an updated investment policy statement? Although you 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. Heres why you should have an IPS and make sure it is up-to-date:
Eligible investments. The IPS will outline the investments that the investment committee believe are appropriate for your retirement plan. This may include investment options like target date funds and collective 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.
Prohibited investments. Typical excluded investments are 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. Most IPS do a nice job of outlining the investment committees, custodians, investment consultants and investment managers roles and responsibilities. Not sure what you should be doing at those investment committee meetings? Review 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. One of the most important roles the investment committee plays is monitoring the investment fund menu for the plan. The IPS should outline how that process will work for your plan. Rely on your investment adviser to provide you with the reports and information you need to effectively monitor your investment menu.
Investment option replacement criteria. Sometimes it is 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 which should be used to remove an inappropriate investment option.
Dont have an IPS for your plan currently? You can find a lot of nice samples on the Internet. If you work with an investment adviser, provision of an IPS should be part of the service package you receive. Since the asset management area is dynamic, it is reasonable to expect your investment adviser to review and update your IPS each year as part of the annual review. An up-to-date IPS is one of the most important keys to fiduciary compliance.
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.
