Nicholas Zaiko
Investment Consultant
Bridgebay Financial, Inc.
The employer-sponsored defined contribution (DC)
plan now represents the primary retirement savings vehicle for most
employees. The increased size,
complexity and recent 401(k) plan litigation, demands greater scrutiny of the
plan's investment options in addition to enhanced administrative
oversight. These issues are not limited
to the 401(k) plans but also 403(b) plans that are under ERISA and DoL.
Revisiting the Oversight Role
The increased significance of the role of the DC
plan now demands additional expert focus on the investment options offered to
the participants. The oversight
structure should also adapt to consider the changing relationship between the
plan sponsor and the service provider as assets in the DC plan grow. Additional services may be required as the
plan grows and the service providers' ability to deliver those services in a
cost-effective way must be evaluated.
Failing to achieve enhanced services or reduced fees as a DC plan grows
may result in an unintentional fiduciary breach on behalf of the plan sponsor
as recent litigation has shown. The
sponsor may also fail to meet its fiduciary duty to participants if the
participation rates, investment selection and education programs are not closely
monitored and maintained.
Investment Oversight
The most effective way to increase investment
oversight is to include members of the treasury or finance departments in the
plan oversight committee. This is an
evolving trend that is spreading throughout the DC market. Since traditional pension plans or defined
benefit (DB) plans directly impact the financial statements, the CFO or
Treasurer are typically heavily involved in both the administration and
investments in those plans. In contrast,
the DC plan has had minimal impact on the employer's income statement and has
historically been overlooked by the treasury group. Recent litigation on fees and fiduciary
breaches have demonstrated that DC plans can have an adverse monetary impact
the employer's finances. Employing the
same robust oversight historically reserved for the DB plan to the DC plan will
greatly enhance fiduciary compliance and minimize risk.
As plan assets grow, plan sponsors may consider
retaining the services of an independent, retirement plan consultant that has the
benefit of working with many different plan providers, investment
funds/managers and plan sponsors. Many
bundled 401(k) plans have relied on the affiliated investment consultant
provided by the recordkeeper that is an employee of the recordkeeper's parent
organization. Periodically, a plan
sponsor should seek a deep-dive review of the investment recommendations by an
independent third-party advisor to ensure that the investment line-up is best
in class with reasonable fees.
The expertise of a retirement plan advisor will
assist the plan sponsor in ensuring that plan fees and services are competitive
with other plan providers. An
independent consultant can also point out any deficiencies in the
administration of and the investments in the plan.
The Plan Committee
Plan sponsors should pay close attention to the
size and composition of their investment committee. The cornerstone of an effective committee is
ensuring that all members represent experts in their particular field of
focus. The best committees are well
rounded, drawing from several different departments. Each member should focus on a particular area
of the plan which aligns with their particular expertise and take the lead in
major decisions. For example, the ERISA
attorney should have greater direct input and authority on providing fiduciary
and compliance advice. Similarly, the
Treasury professional should focus on the investments, leaving legal compliance
issues to the ERISA attorney. The
administrative requirements of the plan should be provided by the benefits
manager and Human Resources representative.
Additionally, an advocate for the participants and employees should also
provide input to the committee. Well
defined roles and segregation of duties is crucial for an efficient and
effective oversight committee.
The committee should be sufficiently small as to
avoid getting bogged down in procedure and scheduling conflicts and allow
sufficient time for proper oversight by each member. Exceedingly large committees may have problems
assembling enough members at any one meeting in order to establish a quorum and
thus inadvertently delay crucial plan decisions.
Investment vs. Administrative Decisions
Investment and administrative timelines tend to
differ dramatically and can often conflict.
Many challenges arise when trying to fit investment decisions into
administrative timelines. The conflict
may become so great, that investment decisions end up being made based on
administrative pressures rather than investment priorities. These types of decisions can potentially
represent breaches of the plan sponsor's fiduciary duty to the plan
participants. For example, leaving an
underperforming fund in the plan because of administrative restrictions after
the committee has decided to remove or replace the fund may open the door to
fiduciary liability. On the flipside,
the plan investment policy should not be written in such a way as to rigidly
trigger automatic action regarding a fund.
The policy should reflect a structure of monitoring that involves the
evaluation of numerous important factors.
Any action taken regarding a fund should be reviewed and documented by
the committee.
Investment Review Process
A well-designed and methodical investment review
and search process is the hallmark of the top institutional DC plans. Any changes made to the plan should be done
so in a well thought out approach which takes into account investment
considerations. While administrative
considerations are omnipresent, they should simply inform but never interfere
with critical investment decisions.
There are some steps that can be taken to reduce administrative burdens
such as utilizing a multi-manager framework and using asset class specific
funds. This makes it significantly
easier to simply replace an underperforming fund with a similar fund with
better performance. The best plan
sponsors also have an established search process in case a fund change is
required at any time, rather than relying on a pre-determined periodic
review. This allows the committee to act
swiftly in the case of an unexpected event.
Though periodic review is important, searches should be conducted in
response to external events and not simply be restricted by the calendar.
Conclusion
Now rivaling the traditional pension or defined
benefit (DB) market in scale, DC plans have taken center stage in employees'
retirement future. As such,
professional, expert scrutiny of the investments offered to plan participants
is becoming increasingly important. The
plan committee composition and size are crucial to providing diligent and
effective oversight in order to protect against fiduciary risk. Engaging the broad knowledge and specific
expertise of an independent investment consultant to share the burden of
co-fiduciary status affords the sponsor further protection and market
insight. A detailed and methodical
review and search methodology, coupled with a comprehensive pattern of
documentation is the one of the best ways to fulfill the sponsor's fiduciary
duties to the plan participants.
