Because retirement plan fiduciaries are held to an exceptional level of duty and care under ERISA, the fiduciary standards that plan sponsors, investment committee members, and others in fiduciary roles must abide by can be summarized by a single phrase: "doing the right thing."
In fact, the legal and regulatory environment, which is constantly evolving, makes it more important than ever for sponsors to understand their roles as retirement plan fiduciaries and be aware of the latest developments and guidance. For example, the Supreme Court's 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer—an important decision that reset the landscape for plans offering employer stock in their investment lineup—should increase fiduciary scrutiny on company stock.
Although the basic fiduciary responsibilities remain unchanged, they still are critically important. When considering what plan sponsors can do to most effectively satisfy their fiduciary duties, these five best practices rise to the top of the list.
1. Have a well-organized and effective investment committee. Committees should include qualified people who know their responsibilities and duties as a plan fiduciary and have the necessary training and expertise to perform in that role properly. It's also imperative that the committee be well-organized, with regularly scheduled meetings (about once per quarter) and the flexibility to convene ad hoc meetings as necessary.
"When the market had its big downturn in 2008, some of our clients' committees did get together and meet," said Dave Burns, senior ERISA consultant and manager in Vanguard Strategic Retirement Consulting (SRC). "Many of them concluded that they should stay the course and see what develops. By simply meeting and documenting their decisions, they helped protect themselves in case of a future lawsuit related to their fiduciary duties."
Documenting decisions is a key component of a well-organized and effective committee, Mr. Burns said. "It's very important to have meeting minutes that clearly indicate what issues were addressed by the committee, and that a prudent, deliberative process was followed when making decisions about the plan," he said.
When making decisions related to the plan, it is critically important to follow the terms of the plan document, the plan's investment policy statement (IPS), and any committee charter document that defines the duties and responsibilities of the committee.
"Every decision that the fiduciaries make should be done in the best interest of the plan participants," Mr. Burns said. "That should be the guiding force that committees follow."
2. Prudently select and regularly monitor the plan's investments. All committee members should have the proper expertise; if they don't, the committee should seek external experts to help select and monitor plan investments. The plan's IPS is an important tool for this—the IPS should define the guidelines that the committee will follow in the selection and monitoring process. Simply following the IPS should help the committee members from a liability perspective.
"The courts don’t always expect sponsors to hit a home run when selecting plan investments," Mr. Burns said. "But they do expect fiduciaries to demonstrate that a prudent, deliberative process was followed and that they acted in accordance with the terms of the IPS. For example, if a particular investment is underperforming, fiduciaries may need to take action—which could mean anything from putting the fund on a 'watch list' to replacing or removing the fund when the underperformance persists over an extended period."
Some companies have two separate committees: an investment committee and an administrative committee. But whether a retirement plan has one committee or two, Mr. Burns recommends multiple investment experts on the committee. With more than one expert, there can be deliberation to reach a consensus opinion about the best course of action.
3. Properly oversee the plan's administrative processes. Fiduciaries must make sure that the plan is being administered in accordance with the plan document and the provisions of current law. Fulfilling this duty means working closely with the plan's recordkeepers to make sure that all of the plan's provisions are being properly administered. In addition, it's a good idea to periodically audit the plan's operations to ensure compliant plan administration.
"An example of this is to make sure that salary deferrals withheld from employees' pay are deposited into the plan as soon as possible after each payroll," Mr. Burns said. "This is a key enforcement area for the Department of Labor."
4. Monitor plan costs. A DOL mandate in recent years that sponsors provide participants with an annual fee disclosure notice heightens participant awareness of fees, gives employees more information than they had before, and highlights the importance of properly monitoring plan costs. Whether the plan has a per-participant charge imposed for administrative services or an asset-based fee where a portion of the funds' expense ratio pays for administration, it's important to be sure that those fees are not excessive.
"There are steps that fiduciaries can take to make sure that plan fees are reasonable," Mr. Burns said. "They can engage an outside consultant to do a fee study for them. There are benchmarking tools they can use. Fiduciaries should also be aware that some funds offer different share classes with higher or lower expense ratios, and it may be prudent to select a less expensive share class if one is available. We've seen court cases where the fiduciaries had chosen good investments, but they could have selected a less expensive share class for their plan. For example, the Supreme Court is currently reviewing a case called Tibble v. Edison International, where this is a key issue."
5. Evaluate company stock. Before the Supreme Court's Dudenhoeffer decision in June 2014, plan fiduciaries could rely upon a legal concept known as the Moench presumption—generally, a presumption that the investment in company stock was prudent, as long as the plan document specifically required that the plan offer company stock as an investment option.
But the Dudenhoeffer decision essentially threw out that presumption of prudence and made it clear that company stock is subject to the same prudence requirements as any other plan investment. This decision makes it important for sponsors to properly document the process they went through to select company stock as an investment option and to periodically review company stock and ensure that it remains a prudent investment option for the plan.
"Most of the fiduciary-related litigation today concerns either company stock or excessive fees," Mr. Burns said, "and we're beginning to see more of those cases fully litigated—not settled early or dismissed early. It's important for sponsors to monitor the outcomes of those cases, because they're going to impact fiduciary behavior."
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