A Matter of Policy

An investment policy statement is a critical part of 401(k) plan.

In the movie Gladiator, things really heat up when the Roman soldier Maximus utters the battle cry, “At my signal, unleash hell!” When Chris Jones, the CFO of S.W. Rodgers Co., found out that his company’s 401(k) plan was underperforming in a raging bull market, he uttered a similar cry.

The results were a little less bloody, but just as decisive: He ultimately fired the vendor after hiring a consultant to help design a stronger plan. And he learned an important lesson about the value of an investment policy statement (IPS). “Until that moment, we didn’t even know we needed one,” admits Jones. “We knew the investments weren’t performing well, but we had no criteria to determine just how badly they were doing.”

That was over a year ago. Today, with a well-crafted IPS at the ready, Jones and the plan’s investment committee have a clear blueprint of how to select and monitor investments, including appropriate benchmarks. “We make sure that the investments meet the standards that we’ve set,” says Jones. Those targets are determined jointly by the client, the consultant, and the vendor.

Like many small companies, S.W. Rodgers, a Gainesville, Virginia-based construction business with 820 employees, initially put all its eggs in one basket, relying on an investment product vendor to put together an investment package for the 401(k) plan and to monitor the investments. Such reliance on a single firm may be unwise, says Fred Reish, an Employee Retirement Income Security Act (ERISA) attorney and partner at the Los Angeles law firm Reish & Luftman. “Clients need to be familiar with the processes that the financial institutions are using, and they need to make sure that they agree with what they are doing,” he says.

That’s where investment policy statements come in handy. Such documents not only spell out performance measurements, they also protect against the short-term “noise” of passing investment fads, says David Wray, president of the Profit Sharing/401(k) Council of America, a Chicago-based trade association of plan sponsors. Employee satisfaction with 401(k)s is generally high, he explains, except for one thing: everyone knows one additional fund that would make his or her plan perfect. Some employees can be extremely aggressive in lobbying for new funds to be added to the plan. “If you don’t have an investment policy that outlines a strategic vision for your investments, it’s difficult to say no to those individual requests,” Wray says. And if the company itself decides a change is in order, he adds, an IPS can provide valuable focus for choosing new funds.

Moreover, an IPS also serves as an incontrovertible piece of documentation if plan performance or administration is ever questioned — by lawyers, that is. Wray stresses this with an evangelist’s zeal. “We need to demonstrate that investment policy statements add value,” he says. “Plan sponsors are responsible for acting in a prudent and deliberate way, and if they are challenged, they need to have evidence of a prudent decision-making process. If you don’t have a paper trail of what you’ve done and why, you can’t prove that you’ve had a diligent policy in place.”

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