It is an historical fact that bear markets occur three out of every 10 years and that bear markets last, on average, anywhere from 10 to 14 months, depending upon when you started counting. To prepare for times like these, there are some proactive procedures you and your plan sponsor can follow to weather the storm.
And they are:
- Review the investment lineup of the plan;
- Review the procedures and policies for addressing the concerns of plan participants;
- Review the expenses of the plan and its fees; and
- Review the plan documents to insure compliance with current governmental rules and regulations.
In this article, we will be concentrating on the first step before continuing with steps two through four in subsequent issues.
Reviewing, on both a consistent and timely manner, the investment options within the framework of the plan is a requirement of a qualified plan, such as a 401(k).
Under the strictures of ERISA, fiduciaries of the plan (you and the plan sponsor for example) investment options are to be ‘sufficiently diverse so as to avoid the probability of large losses’.
While neither ERISA nor the Department of Labor state what steps you and your plan sponsor can implement to meet that rather vague stipulation, an Investment Policy Statement can define several strategies to ensure your plan, from an investment perspective, is in compliance.(it should be noted that while the Department of Labor does not require an IPS in the event of even a routine audit of your plan, it is the first item they will ‘request’ and 80 percent percent of defined contribution plans do not have an IPS).
A properly crafted IPS, with the aid and assistance of a qualified attorney, can initially serve as the defining document as to what served as the criteria for:
- Stating how the investment options were initially selected;
- Stating how the investment managers were initially chosen;
- Monitoring their performance, against their peer group to ensure the initial level of diversification within the investments is still in effect; and,
- Define the evaluative process which will trigger an investment option or an investment manager being pruned or pared from the plan’s portfolio.
An IPS can provide proper documentation, in the event of a Department of Labor audit, that you and your plan sponsor have followed legally required controls and procedures.
The recent and ongoing market mayhem has triggered large losses in the participant accounts and they are undoubtedly wondering what they need do next.
We will address that very topic in the next issue.
Colin Fitzpatrick Smith can be reached via e-mail at rr1058@aol.com.