There are a few basics most experts recommend to companies that sponsor a defined contribution (DC) plan like a 401k and 403b including: form a committee, benchmark fees, document important activities and create an investment policy statement (IPS). But is an IPS required and can a poorly written one actually be harmful?
An IPS is like a recipe for baking a cake – it should provide the goals, approach and methodology for selecting and monitoring a plan’s investments. It should be clear yet flexible and, without one, it’s more difficult for a plan fiduciary to demonstrate prudence. Fiduciary Plan Governance, an ERISA consulting firm, provides some sage guidance about crafting an IPS:
- Scope – Don’t be too detailed or too vague. Spell out the range and types of funds you want without being too specific.
- Outsourcing – Many plans will use third party experts to help with the selection and monitoring of the plan’s funds. Again, don’t name the person instead describe the required expertise as well as the type of professional.
- Contingency Planning – A flexible IPS will allow the investment committee to take action in extreme conditions. Though reacting to every market crisis may not be wise, some situations do call for action.
Managing an ERISA plan can get overwhelming with so many laws and rules which sometimes can appear to be illogical or harsh, but the best advice is for plan sponsors to rely on their common sense and manage their company’s retirement plan like other aspects of their business. Like with a job description, the IPS should define duties and provide actionable plans that allow the committee to make decisions with flexible guidance. The IPS should also be integrated with other company policies to be sure they are compatible.
Bottom line: It’s prudent to have an IPS but dangerous to have a poorly written one or, even worse, not to follow it.
