Barbara Williams, CFA
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.