VideoIn 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."
Yet, even given an IPS's many uses, recent surveys reveal a surprising complacency among 401(k) plan sponsors, despite perpetual anxiety over fiduciary responsibility. A 1999 BARRA RogersCasey/IOMA defined contribution survey, for example, revealed that 44 percent of 401(k) plan sponsors don't have a formal investment policy. While that's an improvement over the 52 percent of 1998, the findings — which were based on responses from nearly 500 plans representing $218 billion in assets and 5.2 million participants — reveal that larger plans are more likely to have such policies than smaller plans. For example, 61 percent of plans with more than 10,000 participants have a formal investment policy, compared with 49 percent of plans with fewer than 250 participants. "That's probably because large plans have greater resources," says David Katz, managing director at BARRA RogersCasey.
Indeed, 31 percent of surveyed plan sponsors cited lack of sufficient resources as a reason for not having an investment policy, while 34 percent said it was because they believed an IPS adds little or no value. But if you ask Steff Chalk, president of Chalk 401(k) Advisory Board, a Cincinnati-based consulting firm, the real reason that companies fail to secure an IPS is that they don't understand all the things such a statement can do for them. He creates one for every client he works with, and says there's no reason other companies should put it off. "It's like balancing your checkbook," he says. "It's something that's not hard, but many people never get around to it."
Fiduciary Fulfillment
Ever since Congress passed ERISA in 1974, CFOs and other high-ranking financial executives have heard the term "plan fiduciary" batted around ad nauseam. But according to Doff Meyer, senior vice president of Delaware Investments, a Philadelphia-based investment management firm, many still don't appreciate just how responsible they may be. Plan sponsors, explains Meyer, are sometimes under the mistaken impression that participant-directed 401(k) plans remove the fiduciary obligations traditionally found under defined benefit plans. "As fiduciaries," Meyer says, "plan sponsors incur a certain amount of fiduciary liability with respect to the investments in the plan, regardless of who directs the participant accounts."
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