Saturday, June 27, 2009
Do you have a 401(k) Investment Policy Statement?
One of the primary obligations of a 401(k) plan sponsor is to prudently identify, retain, and monitor the investment options in the plan. According to several industry surveys, there are as many as half of all plans which have no written guidelines for doing this. The written guidelines are known as an Investment Policy Statement (IPS), and there are lots of templates and resources which make it easy to do.
A good IPS will define the investment categories which are available to the trustees, and give specific guidlines for inclusion/elimination of a fund. We like the fi360 approach (http://www.fi360.com) which consolidates factors such as manager tenure, performance (of course!), style drift, composition, alpha, Sharpe ratio, and more into a Fiduciary Score of 0-100. But there are others, as well - the important thing is to choose an IPS that you are actually going to follow. I would have to consult with counsel to say which is worse: no IPS, or an IPS that you don’t pay attention to. Probably the latter.
So, if you don’t have an IPS, get one. Now.
And if you have one, make sure that you are following the guidelines.
The funny thing is that, if you follow the guidelines and make sure that you always have the best available funds, you’ll have better fund performance and a happier participant population. Why wouldn’t you?