By Joanne Sammer, January 2008 [From SHRM Online’s Compensation & Benefits Focus Area]

February 05, 2008

More companies are establishing a formal investment policy statement for their 401(k)-type defined contribution plans, as they have long done for defined benefit pension plans. The investment policy statement is designed to guide the sponsor’s retirement plan committee as it decides, with the plan’s financial services provider, on investment options to include in the plan, and to evaluate the performance of those investments over time.

The statement should be shared with plan participants to help them understand the reasoning behind the inclusion, and exclusion, of investment options in the planfor example, to provide asset diversification, reduce risk and keep fees low. Spelling out these reasons can help participants to select appropriate investments for their own individual retirement portfolio from the plan’s investment menu.

By way of example.

The Animation Guild’s 401(k) Plan Investment Policy Statement is an example of a statement that’s available online. Also, the Profit Sharing/401(k) Council of America offers a model investment policy statement and white paper (although site registration is required).

The Rationale

Having an up-to-date investment policy explained in a formal policy statement and, more importantly, following it, can go a long way to help plan sponsors show that they followed a prudent process for choosing and evaluating plan investment options.

For large plans, having an investment policy is accepted practice, but small plans often do not have an investment policy statement in place, according to Mark Lamoriello, the president and chief investment officer of LAMCO Advisory Services in Lake Mary, Fla. Nothing in ERISA says having an investment policy is required, he says. But it is difficult to build an investment strategy for the plan without an investment policy.

Unfortunately, the need for an investment policy statement is not getting through to all plan sponsors, particularly those with small plans. Although 83 percent of the 830 plan sponsors surveyed have an investment policy, that number drops significantly among small plans, according to the most recent 401(k) Benchmarking Survey conducted by Deloitte Consulting LLP with the International Foundation of Employee Benefit Plans and the International Society of Certified Employee Benefit Specialists. The survey found that just 68 percent of plans with $10 million or less in assets have an investment policy.