An investment policy statement (IPS) is supposed to define the level of retirement benefits a typical 401(k) participant can expect from the plan, but at least one adviser argues that’s almost never the case. Still, another industry observer believes a more strategic approach is needed to help elevate the nation’s retirement readiness.

Lee Topley, managing director of the retirement plan consulting group at Unified Trust Company, says these documents are far too general, confusing and leave many working Americans wondering if they’re on track for retirement. His firm is one of just a few national independent trust companies in the U.S.

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Lee Topley

Mindful of this dilemma, Unified Trust chose an avenue less traveled about seven years ago, making available a benefit policy statement that’s intended to be as easy to follow as it is comprehensive and actuarially certified.

For example, it uses the color green to signify that there’s a savings surplus or red to show a savings deficit. The document also accounts for multiple factors that include estimated Social Security, retirement age, auto escalation, matching contributions, other savings, the tax rate on distributions, etc. Its overarching goal is to depict one’s retirement savings progress with pinpoint accuracy and be highly customizable for each plan participant.

Drafted with the help of ERISA attorneys, Topley says the benefit policy statement is also a governing ERISA document for the plans it services as a discretionary trustee. “It establishes the default level of what will be factored in to the calculations to determine if someone’s going to have enough money in retirement,” he explains. The starting point, of course, is setting an appropriate income-replacement ratio.

A meaningful difference
While understanding the need and desire to educate, inform, and motivate employees to save enough for retirement, 401khelpcenter.com, LLC President Rick Meigs believes it’ll take much more than creating a customized statement to make a meaningful difference.

“What is necessary to make a strong push to close the retirement savings gap is for plan sponsors to adopt properly designed plans utilizing automatic enrollment, auto contribution escalation, fairly priced managed fund options and a strong advice program,” he says. “In other words, action, not more words in the form of a policy statement.”

Also see:Do investment policy statements qualify as plan documents?

Meigs is also concerned about the benefit policy statement being described as a legal governing document of the plan, which sounds to him like a lawsuit waiting to happen. “We already have plan sponsors who can’t even adhere to their plan’s IPS,” he notes, citing as an example the recent case against Chevron in which a money market fund was used instead of an available stable value fund to maximize participant income.

“I’m not at all opposed to plan sponsors and their trust advisers establishing good educational, participation and contribution objectives for their plan and employees,” he explains, reiterating his point about doing so in a legal governing plan document.

Meanwhile across the industry, Topley laments that so-called retirement-readiness reports issued by service providers fail to factor in many critical specifics at the participant level. He recalls one harrowing example from a major industry player showing a participant who was 100% invested in a stable value fund option with a 3.5% rate of return. The problem, he says, is that “the underlying calculations that they’re running assume they’re earning 6%. That’s a pretty big gap.” Assuming a $50,000 account balance, he says “that’s a 90% error rate.”

A true believer in the power of benefit policy statements, Topley doubts they’ll ever catch on in the employee benefit marketplace. “Even under the new fiduciary rule, many large record-keeping platforms have been exempt from a lot of the qualifications because they’re just record-keepers,” he says.

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