A common legal complaint against plan sponsors is breach of fiduciary duty due to imprudent investment selection. The complainants typically state excessive fees or inferior results relative to peers. However, the investment decisions of a retirement plan are made with no guarantees as to the outcome — the future results are inherently unpredictable. These same decisions are often the ones that come under the most scrutiny. Litigation, after all, has the advantage of hindsight. If only our crystal ball was as clear. So, how best to protect the plan and its fiduciaries?
What plan sponsors and their advisers need to remember is that they don’t have to be right in every investment decision they make. However, they are required to display care, skill, prudence, and diligence when deciding. This means having a process around the selection and monitoring of the investment managers offered by the plan. Some items for consideration:
Experienced Investment Advisor: Plan sponsors should remember that if they lack the skill and experience to make prudent, informed investment decisions for the plan, then they could be well served by hiring a third-party who can provide these abilities to the plan committee. The investment advisor should be willing to serve as a fiduciary, and disclose all potential conflicts of interest. While the plan sponsor could delegate the fiduciary responsibility of investment selection to their advisor, they cannot delegate the fiduciary responsibility of selecting an advisor. This means monitoring the investment adviser’s processes and results over time.
Investment Policy Statement: Perhaps the most important tool to a plan sponsor is the IPS, which serves as a roadmap for the investment decisions of the plan and should be created in collaboration with the plan’s investment advisor. It should define the roles and responsibilities of the significant stakeholders of the plan, such as plan participants, investment advisor, and plan committee. It will also outline the investment selection constraints, such as approved asset classes, and the methodology for selection, monitoring, and replacement of investments. The IPS should be specific enough as to give guidance and appropriate restraints to the decision-making process, but broad enough that the committee can be nimble.
Ongoing Monitoring and Documentation: The plan committee should officially meet to review the results of the plans investments as per the methodology outlined in the IPS at least a few times annually. More immediate news, such as a manager retirement or firing, may prompt the committee to review the investment sooner than scheduled, which means that the monitoring process should be perpetual in nature. Each review of investments should be documented, with the rationale behind any decisions — including keeping investments in the plan. The IPS itself should be reviewed and updated at least annually.
The truth of the matter is that no amount of due diligence or prudent processes can prevent litigation from occurring. However, discipline, prudence, skill, and documentation can provide a measured response that shows the fiduciary process was sound.
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