Discover ways to better manage retirement plans as a fiduciary
The retirement plan landscape in this country is changing – fast. In response to rising scrutiny from the Department of Labor as well as a surge of lawsuits, employers have become increasingly aware of the need to improve their fiduciary processes. Business owners and executives are starting to ask themselves a very important question: Am I doing the right things to protect my employees, myself, and my organization?
It’s easy to understand why so many plan sponsors have avoided that question for so long. As if being a fiduciary isn’t hard enough already, the retirement plan services industry is doing less than ever to help.
The battle to increase volume, by obtaining new plans, in an era of rapid fee compression is leading to a disturbing level of disregard for clients’ best interests. The resulting noise interference is making a daunting job even harder for fiduciaries. This article attempts to cut through that noise and provide a few key areas of consideration for fiduciaries in all stages of the process.
The “Must Haves”
While there are a number of debatable topics concerning the scope of fiduciary obligation in a retirement plan, these are a
few clear-cut items that all plan sponsors should ensure are addressed:
Understand your fees — It’s not about how much, it’s about how competitive. Fiduciaries are expected to know the details of their fees down to the granular level. To assess competitiveness, fiduciaries should benchmark their plan against similarly-sized plans (both in terms of population and assets) receiving similar services. Fiduciaries should remember to adjust for qualitative factors, such as the experience of the service personnel and the unique circumstances about your plan.
Ensure prudent investment processes — The investment selection and monitoring processes must be prudent and involve true experts. Have a well-designed and documented due diligence process. Plus, a carefully-developed Investment Policy Statement can make the oversight process more efficient for your investment committee.
Establish repeatable processes — Managing a retirement plan is especially exhausting – and risky – without a little up-front planning. Instead of the “whack-a-mole” approach, relieve stress with a little up-front planning, assignment of duties, and proper oversight. As much as possible, design consistent processes to make plan administration (e.g. payroll contributions, required notices, plan reviews, etc.) routine. In the long run, it will save time, money, and possibly an unwanted visit by the DOL.
Document everything — If you meet the standards of prudence expected of a fiduciary, then you’re 99% “there.” You will not get every decision right, but hindsight cannot burn you if the decision was made prudently. However, if you fail to document the factors and circumstances that lead to decisions, then you leave the door open to a lawsuit. Document the important decisions you make – both actionable and not.
Many fiduciaries think they will fulfill their obligations simply by having well-intentioned people making reasonable decisions when time permits. Unfortunately, as stated by the 5th Circuit Court, “a pure heart and an empty head are not enough.” The standard of prudence is not good faith alone. If you have a benefit plan, the proper attention must be paired with the proper expertise. The following points represent some of the most common errors plan sponsors are committing unknowingly:
Lack of expertise — Many plan sponsors forego the help of a consultant, acting as a fiduciary , opting to rely on their internal staff to make the investment decisions for their plan. These staff members, equipped with non-fiduciary investment support from their record-keeper, are certainly capable of reviewing statistical data. But general financial acumen and help from your administration firm is not enough. The reality is that retirement plan investment due diligence is highly specialized. If you don’t have a true expert on staff, you are probably not meeting the prudent expert standard.
Failure to demand fee transparency — The days of the “free 401(k)” (pay no attention to the investment fees behind the curtain) are over. If any of your service providers are being paid primarily through revenue sharing arrangements, then it’s time to demand transparency. Every provider worth consideration has developed the ability to work for a clearly-stated fee schedule. Commissions have no place in the fiduciary landscape anymore.
Proprietary investment overload — Ask your record-keeper to disclose all direct relationships with your plan’s investment managers. Such arrangements, in which service providers receive multiple revenue streams from your plan, are too prevalent. Even if you’re getting a fee discount for using proprietary funds, that “carrot” can compromise your ability to perform objective due diligence. Furthermore, proprietary investment – especially insurance company fixed accounts – often make fees impossible to quantify and benchmark.
Forgetting the prime directive — It seems obvious, but plan participants must always come first. This doesn’t mean that certain decisions can’t be in the company’s best interests as well, but they must FIRST be in the participants’ best interests. The following are just a few of the countless examples that challenge fiduciaries on a daily basis:
- The CEO demands you add ABC Fund, but it doesn’t fit the IPS.
- ABC Financial is a big client of yours. They provide 401(k) services, and they want your business.
- Your company is struggling, and ACME Payroll Services offers a discount on payroll services if they get your 401(k) business.
Failure to make the plan a priority — Let’s face it, being a fiduciary is a thankless job. The retirement plan is easy to put in the “distraction” category. There are always fires burning bigger and brighter, directly affecting you and your company. For plaintiff’s attorneys, this is a wonderful dynamic! Courts are unsympathetic to the “busy fiduciary” defense. Protect yourself and your firm by avoiding the “head-in-the-sand” mentality that leaves fiduciaries vulnerable.
Issues On The Horizon
Due to the rapidly increasing amount of fiduciary pressure, forecasting litigious areas of focus is becoming equally as important as having fiduciary obligations buttoned up today. Here are a few areas that are anticipated to be fiduciary hot buttons on the horizon:
Revenue sharing subsidization — A distilled definition for revenue sharing is any “extra” amount built into funds’ investment expenses or derived from the investment that subsidizes other plan costs. Revenue sharing is found in both active and index fund menus and in both institutional and retail share classes. It is almost impossible to avoid! Most plans have revenue sharing of some sort, and most plans have funds that pay different levels of revenue sharing. Where there is potential for inequity, fiduciaries must have a reasonable policy to limit that inequity. Many ERISA attorneys predict unfair revenue sharing will be part of the next wave of fiduciary litigation.
Due diligence on blended-asset funds — Target-date and target-risk funds add multiple layers to the due diligence process. These funds invest in many different asset classes, and they generally do so using multiple sub-managers, each of which needs to be monitored appropriately. Furthermore, because there is no standard asset allocation or glide path, it is difficult to benchmark funds against their peers or an index. In the very least, fiduciaries need to monitor fund fees and ensure they are not blindly accepting their record-keeper’s proprietary options while ignoring other superior investment options.
Now more than ever it is important to be confident that you are doing the right things to keep your organization protected. By addressing the “must haves,” avoiding the common mistakes, and knowing what issues lie ahead, you can be certain that you are doing everything you should to protect your employees, yourself, and your organization. And if you are not sure, to engage an expert organization that adheres to the fiduciary standard to assist you in providing that security for everyone.