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Why Does My 401(k) Plan Need an Investment Policy Statement?

Published by Kim Moore on Aug 2, 2021 6:00:00 AM

If you deal with 401(k) Plans or investments in general, you will have seen the wide market fluctuations that our economy has experienced over the last few years. During situations such as the pandemic or economic downturns, the market tends to have wide swings of up and down performance. We thought it would be a good time to review the need for an Investment Policy Statement for a 401(k) Plan and discuss why it is important.

An Investment Policy Statement will include several items for your Company Retirement Plan:

  • Define the objective(s) of the retirement plan.markus-spiske-XrIfY_4cK1w-unsplash
  • Outline the process of selecting and replacing Plan investments.
  • List any investment type restrictions.
  • Detail those parties involved in investment selection and review including each parties’ responsibilities with regard to the Plan investments.

The Policy statement should be in writing and periodically reviewed and updated as needed. The statement should be reviewed in conjunction with other company policy statements to ensure there are no conflicts in objectives.  

Why is the Investment Policy Statement important?

This Policy is important because it clarifies the need for a continual review of Plan investment performance to ensure underperforming funds are monitored and replaced with other investments that better meet the Policy objectives. It also helps reduce risk for the Plan by defining any investment vehicles (such as derivatives) that are not allowed within the 401(k) Plan Fund Lineup.

Finally, it clarifies roles and responsibilities to ensure all objective are met and there is no confusion regarding overall responsibility for the 401(k) Plan, especially with regard to the investment selection. Plan fiduciaries have a specific responsibility to ensure Plan investments are not underperforming their peer investments, the Plan offers a diverse range of options in the lineup, and that fees charged are reasonable when compared to similar Plan options. A Policy Statement helps ensure these responsibilities are met.

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Retirement plans can be very complex. As an innovative firm Summit CPA specializes in 401(k) audits. We have the ability to offer assistance entirely off-site with little or no distraction to your daily office routine. We also offer flat-fee pricing so there are no surprises on your bill when the job is complete. For assistance contact our office at (866) 497-9761 to schedule an appointment.

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