Why You May Need a 401(k) Investment Policy Statement

No matter how business savvy you are, choosing how to invest your money can be tricky.
If you are a business owner who sponsors a retirement plan, this becomes even more
worrisome because you are expected to choose investments to offer your employees.
While it is possible to divest yourself from some of the risk involved in this process
(a larger topic for a future article), as a retirement plan sponsor you can never completely
remove yourself from this fiduciary duty. This is why an investment policy statement may be
right for you.

An investment policy statement (IPS) is simply a roadmap that a retirement plan sponsor
uses to select and regularly evaluate the investments that they offer to their employees in
the retirement plan. While there are no government regulations that require you to have
one, adopting an IPS can make it easier for you to operate efficiently, and give you some
much-needed peace of mind on the topic of investments.

If you put forth the effort to draft and adopt an IPS, it is critical that you adhere to the
process outlined within this document. It is better to have no IPS than to have one but not
comply with its provisions.

An IPS can be as detailed or vague as you wish but, in my opinion, somewhere in the middle is
the best place to land. An IPS that is too detailed may limit your discretion or force you
into a poor decision. It may also make it difficult to comply with the document, which would
increase your risk exposure. On the other hand, if your IPS is too basic and streamlined,
it may not give you the guidance it is meant to provide. In addition, if you have the misfortune
of being reviewed by the courts or regulatory agencies, they may feel that you didn’t give
this document the attention it merits. This could also increase your risk exposure.

Since an IPS is not technically required, there are no regulatory standards
regarding what should be included in this document. Some common inclusions
are:

• Purpose of the IPS: Why have you drafted this document and how long will it remain
  in effect?
• Purpose of your retirement plan: While this may sound redundant, there are varying
  statements to this effect so it may be a good idea to document yours.
• Primary objectives of the retirement plan. Some examples may be:
  • Provide the participants with the opportunity to accumulate assets.
  • Offer a range and variety of investment options that meet the needs.
  • Deliver plan services, administration, and investment options at a reasonable cost.
  • Provide participants the opportunity to defer taxable income.
• The types of investment vehicles and categories that will be offered.
• Methods of selecting and monitoring the investments offered: What screening
  criteria will you use to select and monitor investments?
• Documentation of a “watch list” and when funds will be
  added to it.
• Determination of why, when, and how a specific investment is subject to
  removal.
• Identification of who is responsible for fulfilling these duties.

Any time you are handling investments, it is important to work
with a consultant who serves you in a fiduciary capacity. A fiduciary is an individual in
whom another has placed the utmost trust and confidence to manage and protect
property or money. They are obligated to act in your best interest. A good consultant
will not only help you craft a viable IPS, he or she will also help you comply with the
requirements specified within the document.

There seems to be a bit of disagreement in the industry as to whether or not a business
that sponsors a retirement plan should adopt an investment policy statement. A well-drafted
IPS can reduce your liability and provide a blueprint for managing the investment options
offered in your retirement plan. Bottom line, you don’t need an IPS but if you have one,
it is a step in the right direction as long as you comply with it.

If you’d like additional information regarding investment policy statements or anything else
401(k) related, please feel free to contact us here at Heartland Trust Company,
701.235.2002 or 877.333.3494.