Does your 401k plan have an updated investment policy statement (IPS)? Although you aren’t required by law to have one, the investment policy statement is one of the primary documents the Internal Revenue Service (IRS) and Department of Labor (DoL) request when they visit employers for plan audits.

Your Investment Policy Statement Should Include


Intention to comply with ERISA section 404(c)

A properly constructed investment policy statement will list the criteria necessary to comply with the safe harbor provisions of ERISA section 404(c) and state the intention of the plan to comply with it. Having an ERISA section 404(c) compliant 401k plan shields the plan sponsor from lawsuits brought by participants for losses on investments in the plan.


Eligible investments

Your investment policy statement should outline the investments that the investment committee believes are appropriate for your 401k plan. This may include investment options like target date funds and collective investment trust funds. Also likely to be included are all nine combinations of large-, mid- and small-capitalization mutual funds spread across the value, blend and growth spectrum.


Prohibited investments

Your investment policy statement should also list those investments that are not permitted in your 401k plan. Typically excluded are investments in any real property (gold, real estate, collectibles, etc.) along with individual stocks, commodities (real or futures), private equity and non-publicly traded stock.


Roles and responsibilities

It is important for the IPS to outline the roles and responsibilities of the investment committee, custodian, investment consultant and investment manager. Not sure what your investment committee should be doing during your meetings? Take a look at your IPS.


Investment option selection criteria

Process is the key to effective fiduciary compliance. A sound investment option selection process outlined in the IPS serves as a guide to helping the investment committee make good investment decisions.


Investment option monitoring process

An important role your investment committee plays is monitoring the investment fund menu for your plan. The IPS should outline how that process will work. Rely on your investment adviser to provide you with the reports and information you need to effectively monitor your investment menu.


Investment option replacement criteria

Sometimes it is necessary to replace a poor-performing or inappropriate investment option. Every IPS should outline the criteria for placing an investment option on the “Watch List” and also the process for removing or replacing an investment option.

Don’t have an IPS for your plan? You can find a lot of nice samples on the internet. If you work with an investment adviser, he/she should be providing you with an IPS as part of the service package you receive. Since the investment business is dynamic, it is reasonable to expect your investment adviser to review your IPS annually and update it every other year.

There is only one thing worse than not having an IPS — having one and not following it. There has been significant litigation against plan sponsors who haven’t followed their IPS and strayed into investments that weren’t allowed. You should be able to rely upon your investment adviser to keep you in compliance with your IPS. However, this is one of those areas that you need to trust and verify. If your adviser leads you astray, you still have fiduciary responsibility for the investments in your 401k fund lineup.

An IPS is a key part of your fiduciary compliance process. Take a look at your IPS today and make sure it is up-to-date.

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About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.