Managing Risk: Do’s and Don’ts for Your Company’s Retirement Plan Committee
Scan the business news and you will likely find an article detailing the latest 401(k) litigation against a company accused of a fiduciary breach. The litigious trend started with corporate behemoths but has been trickling down to small and mid-size plans.
Whether it’s due to increased lawsuits or education efforts, fiduciary awareness has been on the rise. As a result, more plan sponsors are recognizing themselves as fiduciaries. However, plan sponsors still have some confusion about their fiduciary roles and responsibilities and the potential risks they may face when it comes to overseeing their retirement plan.
“We see this regularly and stress that plan sponsors need to understand their fiduciary responsibility and all that it entails,” said Roger Levy, AIFA, an Analyst for the Centre for Fiduciary Excellence (CEFEX). CEFEX is an independent certification organization that works closely with industry experts to provide comprehensive assessment programs to improve the fiduciary practices of investment stewards, advisors, recordkeepers, administrators and support services firms.
“Even if a company outsources their fiduciary oversight for some aspects of their retirement plan, they still have certain obligations under the law,” says Levy. For example, as a plan sponsor, you are still responsible for adhering to the Department of Labor’s Employee Retirement Income Security Act of 1974 (ERISA) guidelines, which govern and enforce the administration of 401(k) plans and their assets.
Here are five ways that plan sponsors can aim to lower fiduciary risk and stay in accordance with ERISA. If you have questions about the complexities of plan management, contact us for support.
1. Plan Committee, IPS, and Governing Documents
Establishing a plan committee is the first step in guiding the fiduciary oversight process. The committee should be a reasonable size and include experienced members of finance, HR, and operations. In turn, members will be responsible for numerous aspects of plan management, often in conjunction with your retirement plan advisor.
Next, the investment policy statement (IPS) is a roadmap for investment oversight because it determines the prudent processes and criteria for selecting and monitoring plan investments. When the plan committee meets, it uses the IPS to benchmark and review funds, fees, and whether the investment strategy is meeting its stated goals and objectives, among other things.
Additional governing documents include the plan document, trust statement, and charter statements that should be read, reviewed, understood, and followed by all committee members.
2. Document the Investment Process
Documentation of processes is critical in establishing fiduciary compliance. This includes recording minutes every time plan fiduciaries or investment committees meet to discuss investment changes or decisions. The documentation must show that due diligence has been taken in advance of a decision. “One of the biggest mistakes plan sponsors make is failing to properly document their investment decisions,” says Levy.
3. Conduct Oversight Meetings
Investment committees should have regularly scheduled meetings (either annually, biannually, or quarterly, depending on the size of the plan) to monitor investment performance, evaluate service provider agreements, and ensure that costs and fees remain reasonable.
Be careful of the tempting “set it and forget it” mindset that leads to infrequent monitoring and lack of process, which can result in a failure to fulfill your fiduciary duties.
4. Fund Choices
Offering numerous funds (i.e., “a fund for everyone”) does not reduce fiduciary risk. Rather, plan sponsors should conduct prudent due diligence to ensure that fund selection aligns with the IPS and corresponding investment strategies are appropriate for the participant population and plan objectives.
The investment choices should not favor a particular asset class over another, nor should they be overtly correlated to each other; however, the fund menu should provide a spectrum of risk and reward, providing participants ample opportunity to create diversified portfolios that are appropriate for their age, time horizon, and goals.
Underperforming funds should be monitored closely and replaced if necessary. Simply adding funds to counteract low performers increases fiduciary risk and can be interpreted as not fulfilling ERISA responsibilities.
5. Fee Transparency and Reasonableness
Since the 2012 Department of Labor rule, the transparency of retirement plan fees has significantly improved. Each year, plan sponsors are provided with a disclosure and information detailing their retirement plan’s fees.
As a plan sponsor, it is your responsibility to verify the accuracy and reasonableness of all plan fees and document the benchmarking process. Best practices suggest benchmarking your retirement plan every one to three years.
While plan sponsors bear significant responsibility and oversight for the company’s 401(k) plan, the burden can be eased by working closely with financial advisors and staying abreast of fiduciary obligations.
The result?
A win-win-win for the plan sponsor, advisor and participants!
Sheldon Nix, WMCP®, RICP®, C(k)P®, QPFC® and Christopher Bozzuto, CFP®
Email: Sheldon.Nix@AdviserFocus.com
Phone: 916-306-7107
Exceed Wealth and Retirement Group
100 Howe AVE Suite 120-S
Sacramento, CA 95825
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This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.
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