You may have selected a bundled provider for the simplicity of how they have selected the retirement investment options. However, were these options selected based on their profits or the best interests of your employees? The Employee Retirement Income Security Act holds you personally accountable for acting in the best interest of your employees.
The options could be biased in favor of the provider if they get paid for investments and recordkeeping services. A provider that sells investments increases their profits if you buy their bundle. The law says that you, not them, are responsible for whether potential conflicts of interest are harming your employees.
Retirement investment options and parties-in-interest
Plans that have more than 120 participants require an audit by a CPA. If your plan requires an audit, you may have noticed a curious phrase: party-in-interest. Let’s say that you use a firm that provides investments and recordkeeping services. It is in their interest to see more money invested in their investment strategies. This makes them a party-in-interest. Do the majority of your retirement investment options bear the name of your service provider? While this is not necessarily a bad thing, you need to independently assess that the investments are appropriate. This should be defined by your investment policy statement.
Retirement investment options and QDIAs
You may have been told the potential risk management benefits of using a qualified default investment alternative (QDIA). You may have heard that many employers are choosing an option based on the age of the employee. Most bundled providers recommend their own version of this option. This option involves much complexity. What is the asset allocation of the portfolio, what are the investments selected and how does the asset allocation change over time. This decreasing risk is known as a glide path.
I have not found an employer that knows the specifics of the glide path of the target date portfolio they have chosen. The Department of Labor in February of 2013 clarified that the type of glide path category you choose is a fiduciary decision. Their press release highlighted the expectation that you affirmatively choose a “to retirement” or “through retirement” glide path. That simply means that the portfolio gets conservative at the retirement year (to) or after the retirement year (through).
Do you independently monitor your retirement investment options?
Investment monitoring is a fiduciary responsibility. Be wary of providers that offer in-house reviews. While it looks good and is professionally done, if it is not independent, you may be facing a rude awakening later. It is in their interest to make their investments look great. Many investment strategies don’t beat their benchmark. It is also important that you use benchmarks in line with your investment policy statement.
Options to save time managing your risk
You might be saying this sounds like complicated stuff. You could choose to delegate both the work and fiduciary liability to someone equipped to do so. Excuse the jargon but what you may want is an ERISA 3 (38) investment manager. This “investment manager” takes on the responsibility for selecting and replacing your retirement investment options.
You should know that picking an investment manager is a fiduciary decision. You are responsible for wisely selecting and monitoring that investment manager. I recommend finding an ERISA 3(21) investment advisor, like us, or an ERISA 402(A) independent fiduciary to help you with the selection process.
I recommend using an independent fiduciary to help you evaluate where you are and help educate you on your options. This fiduciary should have an understanding of the Employee Retirement Income Security Act, not just investments.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
(3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IL, MI.
(4) 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 advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
