For many years, ERISA lawyers argued the merits of creating an investment policy statement for 401(k) plans. They debated whether a written IPS reduced fiduciary liability or increased it? In fact, the U.S. Department of Labor does not require one. On one side of the argument, some believe putting something in writing only provides one more piece of ammunition to supply the DOL. On the other side, there are those who feel outlining an investment due diligence process through an IPS, and then documenting its successful implementation, can reduce fiduciary liability.

Constructing an effective IPS for 401(k) plans is part art and part science. Its structure differs from the traditional IPS template offered by the CFA Institute in that a 401(k)IPS, at least one for a plan using the 404(c) safe harbor provision, necessarily must contain at least three materially different investment objectives. This contradiction runs counter to the traditional IPS structure. We don't have the space here to provide a detailed outline of a modern 401(k) IPS, but we can offer these five tips to help you build a better 401(k) IPS:

Is the IPS tied to the corporate vision and mission? Companies spend hours developing a strategy. It's important the 401(k) plan support that vision. The IPS must be written in a manner consistent with the plan sponsor's vision and mission. That includes incorporating company demographics.

Does the IPS have meaningful and clear objectives? Here we mean tying together 404(c) investment options to plan demographics and investor personalities with the due diligence process used to select and monitor those options.

Is the IPS measurable? Meaningful and clear objectives are one thing, but it they aren't measurable, the IPS fails. It often helps by beginning at the finish. Identify what's measurable – participation, deferral rates, hard dollar savings – and work backward.

Does the IPS allow for independent due diligence? Don't believe for a moment the IPS offered by a third-party investment provider fits the plan's needs. These generic statements often only fit the provider's needs.

Is the IPS properly communicated? If a tree falls in the forest and there's no one there, does it make a sound? Likewise, printing an IPS on the remnants of that tree serves no purpose if there's no strategy to communicate the document's purpose to plan trustees and fiduciaries, employees and vendors.

The DOL wants to focus on process and the IPS offers a direct route to meet this objective. But be warned, an improperly structured IPS could lead to compliance troubles. The 401(k) plan sponsor is best served by working with an independent fiduciary consultant to draft the IPS.

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Five steps to a better IPS for the 401(k)

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