Barbara Williams, CFA
Managing Director
Bridgebay Financial, Inc.
Based on our experience in working with pension and
retirement plans and meeting with providers and plan sponsors, we have seen
there is frequently a difference between the requirements of the law and the
steps needed to keep your plan in top shape. By following these basic guidelines,
your fiduciary responsibilities as a plan sponsor will be greatly enhanced.
Establish & Update an Investment Policy
Statement (IPS) That is Consistent With the Plan
Plan advisers and consultants advise plan sponsors
on the importance of having an IPS to establish a prudent process. Plan
fiduciaries will find it much easier to ensure an objective, well-documented,
process to monitor and conduct the plan's investment activities in accordance
with a set of written, established, prudent standards. The most important
aspect of the IPS is to follow it and abide by its standards. DOL examiners
routinely begin an audit by reviewing the IPS. They check that the Plan is
being managed in compliance with the IPS and plan document.
Form and Convene a Well-Informed Plan
Investment Committee
ERISA states that the named fiduciary of the plan
(an individual or a committee) must make “prudent expert” decisions that are in
the best interests of plan participants and beneficiaries. ERISA allows you to
form a committee or utilize outside experts to help you make these decisions
and that is recommended. ERISA has a personal liability clause so make sure
your committee members are knowledgeable and willing to participate in the
decision-making responsibilities for the plan.
The committee must meet regularly in order for the
plan to be properly and prudently managed as the law requires. A written record
such as minutes of the meetings is an essential item in documenting the results
and deliberations. These minutes can provide committee members with a history
of the proceedings, the alternatives and recommendations presented, as well as
the decisions made.
Fiduciaries Should Understand Their Roles
and Responsibilities
The most important thing is to understand who the
plan fiduciary is--who has the ability to control and influence the plan
assets. A fiduciary is any person or entity named in the plan document (e.g.,
the plan sponsor and trustee), any person or entity that has discretionary
authority over the management of a plan or its assets (all individuals
exercising discretion in the administration of the plan, all members of a
plan’s administrative committee and those who select committee members), and
any person or entity that offers investment advice with respect to plan assets,
for a fee.
Importantly as plan sponsor, the authority to
appoint a fiduciary makes you a fiduciary - and that hiring a co-fiduciary does
not eliminate your fiduciary duties. If you are a fiduciary and you feel that
you lack the expertise to make those decisions, you are expected to hire
someone with the professional expertise to carry out the investment and
monitoring functions for the plan.
Proactively Monitor the Plan Investments
and Replace Underperforming Funds
Whether or not you have a written IPS, the
committee is expected to conduct a review of the plan’s investment options and
eventually that review will turn up a fund that no longer meets the criteria
established for the plan. A written IPS will provide you with the discipline to
place that fund on a “watch list” or drop the fund completely and map any
participants’ balances to a new, more appropriate fund one that meets the
plan’s criteria.
By misunderstanding the qualifications for 404(c)
protection, many plan sponsors think their plan meets the standards of ERISA
404(c), a provision that protects them from being sued for participant
investment decisions, as long as certain conditions are met.
You may be covered from an individual participant’s
claim, but industry experts have expressed concern that very few plans meet
those standards and offer no protection from a participant’s suit predicated on
an inappropriate investment option. The Department of Labor assumes you are
responsible for every participant investment decision except those behind the
404(c) “wall.”
Know What's in Your Target-Date Funds
Target date funds now represent the single largest
asset category in most 401(k) plans and are typically designated the QDIA.
Currently the DOL has opined that the managers of TD funds are not fiduciaries
Investment Committee members are fiduciaries yet TD investment managers are not
fiduciaries of the plan. Yet, the plan sponsor has no choice in the TD funds'
selection of the underlying assets (commodities, high yield, emerging markets)
included in the plan's target date funds when they are the only suite of funds
offered by a bundled provider. Some legislators want to change this to make
fiduciaries out of the money managers who make the asset allocation decisions
and manage the assets since they have sole discretion in making investment
decisions.
