404(c) and investment alternatives

[Guest caddieadmin]

Just wanted to start a little open discussion. The company I work for is about to initiate a 401k, and the investment managers we're choosing to go with said two things that I didn't agree with. Now, bear in mind, I don't have industry experience dealing with these two questions, but I have certainly been reading everything I can get my hands on. So I was hoping some of you might be able to lend your expertise.

The two things I didn't agree with:

1. Investment Policy Statements aren't needed, and they add more liability to the business owner than they prevent.

2. "We're looking at offering your guys 25 investment alternatives, which would cover every asset class."

Now, although they aren't required under fiduciary law, I thought IPS's certainly streamlined the investment management process.

I also thought that after reading several behavioral finance studies people are coming to the conclusion that once you offer MORE than 9 or 10 investment options, participants start to become paralyzed by analysis and start leaning towards more conservative investments, because they aren't sure what they should choose.

Now for someone who really wants this 401k to take off and have a lot of guys participate, what do you guys think about these statements with your experiences?

Thanks so much.

[John Feldt ERPA CPC QPA]

Investment Policy Statements are not required by the law or regulations. However, as I see it, if you plan to take advantage of the relief provided under 404(c ), certain procedures/guidelines must be followed to continue to receive such relief. In order to demonstrate that you are meeting your fiduciary requirements, the investment policy acts as a guideline by which you can measure your actions and the other fiduciaries' actions. Again, it acts a guideline, not a strict requirement. If the IPS is written well, it will say as much and allow flexibility. Also, a good advisor can help you with the drafting of IPS so that they aren't stuck with guidelines that they can't fulfill.

Some of the things you may want the IPS to cover would be:

1 How does the fiduciary satisfy is obligation to prudently select investment options?

2 What considerations are made when selecting or adding funds?

3 How does the fiduciary plan to periodically monitor those investment options?

4 Based on such periodic evaluations, how will the fiduciary determine whether or not each investment option should continue to be made available to the participants?

5 For participants who fail to make investment elections, how is the default fund determined?

6 If the plan allows brokerage, what factors are used to select and monitor the appropriate brokerage firm?

7 If the plan offers RIA service, how was the RIA provider selected and how is it monitored?

8 If employer stock is offered in the plan, who will report on its suitability to continue as an investment option?

9 and so on.

If you do not have an IPS, will your advisor be doing all of the above (and more)? More importantly, how will you know they have done all that they should? If you, as plan sponsor, do not provide such written expectations, how will you know when the advisor has gone outside of what you would think is prudent? Even though the advisor may be considered a fiduciary, remember that you are on the hook for selecting them and therefore responsible for decisions they make (or fail to make).

Having written guidelines (that you review periodically) can be used to make your advisors to do their work. If you periodically ask them about each IPS item when you meet with them, they will be answering to you, needing to prove to you that they have done you have stated should be done. If you have no list of guidelines, then they have done everything you have specified, plus how will you know when it's time to change advisors?

As for the number of funds, I have a vague memory of a report years ago (maybe Vanguard?) where the participation rate was only slightly lower when a large number of funds were offered. My memory is not very reliable on this, but I think it might have been after 15 or 16 funds? Do not rely on my memory for this however.

Hope this helps.

By the way, are you still planning on designing, establishing, and administering this plan in-house, including the plan document and it's requirement to be kept current with laws/regs as they change?

[Guest caddieadmin]

I'm very impressed that you remembered a post of mine in another section of this forum. And honestly, there are so many ways I'd like to answer that question. But in the end, I think the best response I could come up with would be "no." Regardless of how much I've learned, I would really like to limit my fiduciary liabilities until I have some really good experience and credentials behind me. Like a law degree. Or a CPA. Or a CFA, series 6, 7, and any number of OTHER countless things to know in order to be able to handle just ONE of the many aspects to retirement planning. There is so much to this industry, and I think you guys were right. Better to leave it to the experts. At least for now.

But, thanks to all my research, I have an extremely good idea of what attributes the plan needs to have to reflect the industry it's dealing with. So if these investment guys and their actuaries can't put something together exactly to our liking, I'm already in contact with some ERISA attorneys that could do the job instead. So the administration, design of the plan, investments, and amendments to the plan/automatic updating to adhere to new regulations would be done by somebody else, and not me.

I also really appreciate the thoughts you had on the IPS. Some great things to think about.