Many 401(k) and ERISA 403(b) plan sponsors investment committees don’t understand a fiduciary’s duties. One of the issues may be that they’ve never received any formal training. It appears to them that the management process looks a lot like other business decisions that they routinely make. Unfortunately in most cases the firms they hire to administer the plan take on no fiduciary duty.
A practical approach to monitoring a fiduciary’s duties
The key fiduciary duty is acting in the best interest of your employees. Would you allow exorbitant commissions to be taken out of the accounts of people that you are in charge of looking after? Would you care less if they could or could not retire with the standard of living near what they had been prior to retirement? Would you ask for in-depth explanations as to why the activities of the financial advisor, third-party administrator and recordkeeper landed employees with balances slightly higher than if they just saved their money in an IRA?
How can you determine if something is in the best interests of someone unless you look at their results? The main result is their ability to create sustainable retirement income. The goal of retirement income security is built into the act that created the 401(k): The Employee Retirement Income Security Act. The inputs are tax-deferred savings along with growing those savings through investing in order to grow a balance to be used for sustainable retirement income.
The typical hired parties, investment companies and stockbrokers, focus on investments. Their focus on investments could represent a conflict if they recommend investments that put more money in their pockets. After all investment professionals make money on the money invested in your plan. Do you have specialists focused on increasing savings through plan design or advice?
How do you fare on these questions to carry out your fiduciaries duties?
As an employer, you can take steps to help ensure your plan is successful.
- Have you put in place a process to comply with the recently enacted employer plan fee 408(b)2 disclosures ?
- Do you know what your plan’s expenses are and how they compare with industry averages?
- Do you have your plan’s goals and objectives formally documented?
- Are you happy with the level of participation and contribution rates by employees on your plan?
- Do you know how the provisions (features, match, etc.) in your plan compare to industry averages?
- Have you checked with your employees to see how well they understand the plan features and what information they need to make better investment decisions?
- Do you measure the effectiveness of your education/advice program each year?
- Do you know who is considered a fiduciary on your plan and have they acknowledged their status in writing?
- Do you have a formal Investment Policy Statement and is it referenced during plan reviews?
- Do you formally review your plan investments against appropriate benchmarks at least annually?
- Do you know what criteria to use for replacing an investment within your plan?
- Do you have a documented method for keeping informed of changes that could affect your plan?
- If your plan intends to comply with 404(c), has an annual audit been done to qualify for its protection? Or have you opened up unnecessary scrutiny by inadvertently checking off the box?
Checkmarks do not automatically satisfy a fiduciary’s duties
I find that many fiduciaries say that my financial advisor or recordkeeper handles everything. But is it effective? My experience is that most often that is an assumption and not even a checkmark. Some fiduciaries assume that their providers are fiduciaries. However, there unable to tell me what type of ERISA fiduciary that person or entity is legally on the hook for. Besides best practice for these contracts are to have them reviewed by an attorney that is a specialist in this area of the ERISA. It’s known in the industry that few advisors actually specialize in this area of the business. Many company fiduciaries assume that a financial advisor is a financial advisor. That’s like saying I have a doctor. Are they an internist, orthopedic or orthopedic with a specialty in spine surgery? Each one is a doctor but has varying competencies when compared to the other types of doctors just noted.
An employee’s perspective of how well you have carried out your fiduciary’s duties
- Have you or a CERTIFIED FINANCIAL PLANNER™ professional done a Retirement Projection Calculation? (to determine if your savings is on track or not)
- Do you know what deferral percentage of your income along with the company match will yield an independent retirement?
- Do you feel you understand the benefits and features on your plan really well? (e.g., loan provisions, vesting, match)
- Have you had a professional investment advisor perform a risk analysis? (to determine how much fluctuation will occur in your account yearly)
- Do you feel you understand the investment options in your account really well?
- Have you rebalanced your account in the last two years, automatically or manually?
I strongly believe that a plan should not be judged simply on an expression of competence. An even better approach is to actually have the data that tells you the percentage of people on track to replace, say 70% of their income. Think of that as an actuarial assessment.
Assessing your fiduciary duty execution
We’d like to help you regarding assessing how well you are executing on your fiduciary duties. We believe that your plan should have 90% participation, a 10% savings rate and 90% of your employees invested in some professionally managed portfolio. We are providing the Employer Report Card Final so that you can score yourself on some of the questions that we have asked. Based on your score you may want to engage us and our resources for a deeper evaluation of your plan.