Reflecting on the gravity of plan sponsors’ fiduciary duties, many plan sponsors don’t even realize they fall under the fiduciary umbrella to begin with. For example, many plan sponsors believe that just by hiring an adviser they do not have a fiduciary obligation to understand the investments in their plans. This is fundamentally wrong and something that I work closely with my plan sponsors to understand.
First and foremost, plan sponsors need to understand that an investment menu is not designed in a vacuum. The investments they choose, often with the help of an adviser, should be selected with the plan demographics and objectives in mind. Take target-date portfolios, for example. When choosing a target-date portfolio, plan sponsors should review such statistics of their plans as savings rates, demographics, ability for participants to have outside retirement savings accounts, and so on, to determine the best-fit glidepath and strategy that aligns with the greatest percentage of plan participants. The key here is to choose investments with intentionality — that is, choose investments that align with plan demographics and participant objectives.
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Most plans hold investment options that build an allocation that fits their individual risk tolerances and objectives in other various ways. Again, when choosing these investments, intentionality is key. In order to meet ERISA guidelines there needs to be a representative amount of low correlating asset classes—a selection of equity investments along the capitalization and regional spectrum, and fixed income investments that give a participant access to a broad range of credit qualities. Proper utilization of these asset classes can give participants a diversified portfolio.
Document everything
Besides the specific selection of investment options for the plan, it is imperative that plan sponsors document all the decisions and the rationale behind them. I advise all my plan sponsors to implement an investment policy statement, which details the process behind investment selection, monitoring and removal, if need be. Document committee minutes and the pros and cons surrounding a decision. This will help with understanding while proving that there is a process in place.
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Of course, I can’t go into all the nuances behind the myriad investment options. What plan sponsors should remember, however, is that as fiduciaries, they have an obligation to act as a prudent person would. That means that they have a duty to understand the rationale of their decisions and be able to justify it through documentation and committee minutes if called upon. Through careful study, deliberation and the counsel of their adviser, plan sponsors can construct investment menus that are thoughtful and designed specifically for their participants—all while addressing their fiduciary duties. EBA
Ludwig, ChFC, AIF, CRPS, is an LPL Financial adviser with LHD Retirement. Reach him at jludwig@lhdretirement.com.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
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