Some of the basic best practices in running defined contribution plans like a 401k or 403b include forming a committee, benchmarking fees, documenting important activities and creating an investment policy statement (IPS). Though an IPS is not required, it provides a recipe or guideline for selecting, monitoring and replacing funds.
Like with many aspects of running a plan, experts recommend a healthy combination of process, which is prudent, and documentation for the IPS. Because it you don’t document activity or policies, the DOL and courts will not acknowledge it. Experts also warn against a “set it and forget it” approach that most participants take – the investment needs of a plan do change which should be reflected in the IPS. But if the IPS has to be modified frequently, it is likely that it is poorly written. Some Investment Committees make the mistake of using criteria not found in the IPS to evaluate investments because, worse than not having an IPS. is not following it. That’s an easy target for DOL auditors.
Other best practice for a DC plan IPS include:
- 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.
