Fiduciary Opportunities
By Brad Brewer, CPA, Innovest Portfolio Solutions
While many plan sponsors view the fiduciary obligations associated with retirement plans solely as a burden, it is refreshing to see many plan sponsors embrace their obligations. More plan sponsors are taking the view that fiduciary responsibility is more than an obligation; it is also an opportunity to build a sound retirement program and equip plan participants to better secure adequate retirement savings. In this article, the traditional fiduciary responsibilities will be summarized and an expanded set of opportunities will be explored for plan sponsors and advisors to consider in pursuit of better fulfilling their role as fiduciaries.
Plan sponsors, recognizing their role as fiduciaries, understand they have responsibility for the structure and operation of the committee charge with plan oversight, plan investment monitoring, and governing plan documents.
Employee Benefit Committees (EBC)
Most organizations structure EBCs to allow representation from all significant business functions and bring the requisite expertise to address the many facets of overseeing an employee benefit plan, particularly a participant directed retirement plan. Typically, this structure results in an EBC comprised of officers or directors representing human resources, legal, finance, risk management, and operations. Each committee member should acknowledge they are a plan fiduciary, be educated on the role and responsibility of a fiduciary, and know that fiduciaries are held to the standard of a prudent expert.
From an operational standpoint, it is essential that the EBC actually meet on a quarterly or semi-annual basis. A central due diligence file should be maintained to include items such as agendas, notes, minutes, and supporting documentation for the process followed in making plan administration and plan investment decisions. Documentation to support a prudent process for making plan decisions is crucial, especially in the area of hiring service providers such as recordkeepers, consultants, and auditors. Without proper due diligence procedures and documentation, an EBC can not substantiate that they fulfilled their fiduciary obligation to act in the best interests of plan participants.
Plan Investment Monitoring
Committees have the fiduciary responsibility to structure an appropriate investment menu, select prudent investment managers, and monitor the performance, fees, and qualitative characteristics of those investment managers. Most committees acknowledge they are not a prudent expert in this area and they delegate these responsibilities to an outside consultant.
When selecting an outside consultant to monitor plan investments, it is imperative that the outside consultant be completely independent. If the outside consultant's recommendation can influence their compensation through commissions or revenue sharing payments, this creates an inherent conflict of interest. This conflict has received heightened attention recently due to the SEC investigation that revealed certain brokerage firms channeled the vast majority of their clients' investments into mutual funds that paid them higher commissions. Complete independence on behalf of the consultant eliminates this scenario, allowing for advice that aligns with the interests of the committee and plan participants.
Governing Plan Documents
Committees should work with competent ERISA counsel to ensure the plan's governing documents are up to date and in compliance with all regulatory guidelines. Just as important, the committee needs to have procedures in place to ensure a plan is administered in accordance with its terms. For example, if a plan has a unique definition of compensation, a procedure needs to be in place to ensure that the definition is followed when calculating employee deferrals, employer matching contributions, and employer profit sharing contributions.
If a committee suspects there may be some plan operational failures, they should consider engaging professionals to conduct a compliance review. A compliance review is a type of audit where critical plan operations are tested to compare a plan's actual operation to the terms of the governing plan documents. While correcting a plan operational failure typically creates a cost to the employer, failures discovered and corrected early on can be much less costly than if discovered by the Internal Revenue Service or Department of Labor during audit. To prevent compliance review findings from discovery, committees should consider having outside ERISA counsel engage the professionals conducting the compliance review rather than the plan sponsor.
Developing sound processes, committing to follow them, and documenting decisions will go a long way to ensuring the fiduciary obligations are fulfilled. Yet, some plan sponsors have determined that meeting these core responsibilities is not enough and take advantage of their opportunity to create a truly successful retirement program for plan participants. While the shell of success for plan participants has been created, without measuring participants' "success", a plan sponsor does not know if their plan is providing adequate retirement benefits. To measure a plan's "success", plan sponsors should evaluate participation and deferral rates, participant investing and asset allocation, and the success of investment education programs. This is very important, because for most plan participants, their defined contribution plan will need to provide their primary retirement benefit.
In our review of retirement plan providers, quality providers have the tools available for plan sponsors to gauge participants' savings and investment behaviors. Communication materials can be targeted to the participants that appear to be at risk. For example, if the participants in only one investment fund (not a lifecycle or target date fund) are identified, materials on the importance asset allocation or an invitation to an asset allocation seminar could be directed to that group of participants that appear under-diversified. For plan sponsors that our firm has taken through this process, participants appreciated the guidance.
It is not a giant leap to take this next step in managing a retirement program. It completes the circle to ensure the original purpose of the plan is being fulfilled. Serving as a plan fiduciary results in responsibility, but also provides significant opportunity. A fiduciary has the responsibility to develop a well diversified menu of quality investment options and review plan costs to ensure there is a reasonable balance between participant services and the plan costs. They also have the opportunity to address participant investment quality and the rates of savings to increase the likelihood that participants secure adequate retirement benefits.
Brad Brewer is an investment consultant with Denver based Innovest Portfolio Solutions. He provides investment consulting services primarily to defined contribution and defined benefit plan sponsors. He can be reached at bradb@innovestinc.com. Innovest is a fee-only investment consulting firm.
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