In evaluating many 401 (k) plans over the past 25 years, I have found many fiduciary nonconformities and lots of opportunities for improvement, beginning with the investment policy statement.

I find many plans that have an IPS either don't apply it as it is written or it is missing several parts. An IPS should include:

•  An executive summary of the IPS purpose and objectives.

•  Roles and responsibilities for fiduciaries and nonfiduciaries supporting the portfolio.

•  Investment selection criteria and monitoring procedures (usually 11 to 12, including risk-adjusted criteria).

•  Procedures for handling investment options that fail to satisfy established objectives.

•  Appropriate diversification within and among investment vehicles.

•  Services to assist participants in making investment decisions.

• Procedures for controlling and accounting for expenses.

In many cases, I also find that if an investment policy committee exits, bylaws, minutes or documentation of the committee's activities does not. It's also my experience that most committee members have received no formal fiduciary training - other than on the job - and therefore don't really understand their roles and responsibilities.

Even with plans that have an IPS that contains the guidelines listed above, they often fail to follow sound monitoring procedures for investments.

Some of the criteria used in monitoring investments are:

•  Investment style (R2 and style drift).

•  Performance (one-, three- and five-year performance vs. five-year up/down capture vs. peers).

• Risk/risk-adjusted factors (information ratio for three and five years, and beta for three and five years).

•  Qualitative factors (longest-tenured manager greater than or equal to Morningstar, and net expense ratio is less than the average for their particular Morningstar category or asset class).

404(c) checklist

One of my other consistent findings is that there is no Department of Labor Regulation 404(c) checklist.

This regulation provides some minimization of fiduciary responsibility by plan fiduciaries with regards to investments if the checklist items are met. This checklist generally contains 20-25 items. Among them, the plan must:

•  Be an "individual account plan," such as a 401(k).

•  Permit participants to give instructions, written or otherwise, with respect to the investments of their accounts.

•  Provide participants the opportunity to exercise control over the assets in their accounts.

•  Provide participants the opportunity to receive written confirmation of investment instructions.

•  Offer participants a choice from a broad range of investment alternatives.

•  Feature alternatives that are diversified and have materially different risk and return characteristics.

•  Consider underlying investments of the look-through investment vehicles, determining whether the plan satisfies the diversification requirements, where look-through investment vehicles are available as investment alternatives to participants.

•  Give participants the name, address and telephone number of the fiduciary responsible for receiving and carrying out participant investment instructions.

•  Notify participants of any limitations on giving investment instructions under the terms of the plan, including those imposed by the recordkeeping system.

•  Offer participants a written notice that the plan intends to comply with 404(c), usually found in the summary plan description.

•  State that plan fiduciaries may be relieved of liability for losses due to participant investment direction.

•  Provide participants with a copy of the most recent prospectus received by the plan, immediately prior to or immediately following their initial investment in a fund, if the investment alternative is subject to the Securities Act of 1933.

•  Record or log of participants' requests and how fulfilled.

Michael M. Kane, CLU, ChFC, AIFA, is a principal at Michael M. Kane and Associates, a member firm of National Retirement Partners, an independent consulting firm dedicated primarily to the retirement plan market. He can be reached through www.michaelmkane.com.