Last week Philip Murphy of Dow Indexes posted How Benchmark Selection Can Support A Retirement Plan's IPS, outlining the importance of having a formal Investment Policy Statement, and what that IPS should say. Most plan sponsors create an IPS for their total 401(k) plan, but few recognize the importance of writing a separate IPS for their default investment, which is usually a target date fund. Default investments are by definition employer-directed rather than participant-directed, so there is a higher level of fiduciary responsibility, especially the duty of care. The following are solid fiduciary practices:
- Fiduciaries are duty-bound to establish objectives for their TDF, rather than accepting the objectives foisted upon them by fund companies. Specifically, replacing pay and managing longevity risk are NOT objectives; they're mere hopes.
- Having established objectives, benchmarks should be set up to monitor progress toward achievement.
- Finally, the entire decision process, including objectives and benchmarks, should be documented in an Investment Policy Statement. Importantly, the statement should state the reasons that a particular TDF was chosen.
In case you haven't opened the hyperlinks in the above three points, they each expand in detail upon my recommended fiduciary practice; so please open them.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.