"Fiduciar-ily" confusing - that's how I would describe the responsibilities that fiduciaries of retirement plans have in today's regulatory environment.
Whether the plan is a 401(k), 403(b), defined benefit or profit-sharing, it's not an easy task to provide your employees with, what most experts still agree is, one of the most valuable employee benefits available.
The recent bear market certainly didn't help matters. With many accounts being cut in half for a brief period in early 2009, participants took this unexpected "gut-check" as an opportunity to begin asking questions.
They wanted to know whether or not the investment options made available (and the associated fees) were being reviewed by the fiduciaries and were in their best interest. Numerous lawsuits against fiduciaries have resulted and the Department of Labor and Congress are on a mission to help correct the imperfections discovered.
As a member of the American Society of Pension Professionals & Actuaries, I am a supporter of the employer-sponsored retirement plan and believe it offers individuals a significant benefit to defer taxes and save for retirement. Some fiduciaries, however, are concerned that the responsibility and liability they have in providing this benefit is more trouble than it's worth. It does not need to be that difficult, if you have the right expertise on your team, independently review and benchmark your plan's investment options and fees, and act in the best interests of the participants. Here's a more detailed action plan:
1. Adopt and monitor an Investment Policy Statement - An IPS describes the qualitative and quantitative criteria set for choosing investment options in a retirement plan. Over time, if it fails to meet this criterion, it is removed and replaced. What's worse than not having an IPS? Having one and not following it. The IPS is one of the first things the DOL requests when performing an audit of retirement plans.
2. Review the plan's investments at least annually - Fiduciaries should annually compare the investments offered in the plan to the criteria set in the IPS. If your plan has engaged an independent adviser, it is typically part of their service to provide the analysis for discussion. Fiduciaries should ensure this review is independent and not provided by a conflicted party (e.g. the vendor).
3. Comply with ERISA Section 404(c) - This section of ERISA is probably the most widely referenced section in the retirement plan world when it comes to fiduciary governance. It's a little too detailed for this article, but the gist of it is: If your plan (and the processes surrounding it) meets certain criteria established by ERISA, then the fiduciaries of the plan will not be held liable for losses incurred by a participant's individual investment elections. A common misconception: Even if your plan does comply with ERISA Section 404(c), it does not waive the fiduciary's responsibility to prudently monitor the investment options and expenses.
4. Gain a full understanding of the fees charged to your plan - Mutual fund expense ratios, asset-based fees, "wrap" fees, 12b-1 fees, per-participant fees, etc. The fees in retirement plans can be both confusing and overwhelming. Some can be very transparent, while others are buried in a 300-page prospectus. The DOL is working hard to improve this, but whether or not it will truly fix the problem is yet to be seen. Despite all the confusion, however, not having a full understanding of fees, revenue-sharing payments and adviser compensation could easily lead to a fiduciary breaching their duty.
5. Gain a full understanding of all conflicts-of-interest - Proprietary funds offered by your vendor, adviser affiliations, compensation arrangements and revenue-sharing are just some of the possible conflicts in many retirement plans. The public has come to realize some of this and the industry is slowly responding with more transparent offerings. The DOL may speed this along with new rules. Make sure you ask the necessary questions to your adviser so you know how "independent" the oversight is. Not having an understanding of these conflicts could lead to a breach of duty.
6. Have the right expertise - When it comes to performing all of the above, the DOL has explicitly said that, "unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert." Without knowing any better, many fiduciaries have relied upon conflicted (e.g., vendors') or inaccurate advice. It is important to determine whether the source of the information you rely on is qualified and independent.
The constantly evolving world of retirement plans continues to become more of a niche and detailed industry. Having the right team can make all the difference.
Craig Stanley CPA QPFC is a qualified plan financial consultant and the director of retirement plan services with The Summit Group of Virginia LLP. He can be reached by calling 757-499-8300.