Fiduciary Fitness: Basics for a Maintenance Routine
Updated: Oct 22, 2018
We all have our morning routines. Mine typically begins around 5 and heading to the gym. Now that I’m in my 60s, I focus more on not losing ground than getting buff. That done, typically get to my desk, whether at home or the office, by 7 to go through email as well as a fairly wide range of articles and updates that have come in from various news feeds, Google Alerts and news aggregators. Usually, these are just background. Occasionally one or two make me pause and think of interacting with the piece and/or the author.
This morning two pieces came through on a single Google Alert:
The first, 5 Things Plan Sponsors Should Know Before Hiring an Advisor was by the always worthwhile Nevin Adams at NAPA.net who’s been around, I’d guess, almost as long as me, although much more visibly. The second, How to Craft the Best 401(k) Investment Menu was posted on 401k Specialist by Bob Lawton, an advisor in private practice who, according to his bio, formerly led the retirement plan practice for Graystone Consulting, a business unit of Morgan Stanley.
Back to Basics
Although there is nothing new or unique in either piece, each performs a valuable service as “back to basics” reminders that are important in this time when so many of our social, political and business institutions are being stress-tested. I think the lessons of each are worth acknowledging and repeating, with a little commentary of our own. We begin with Nevin’s piece and will follow up with Bob’s in our next post.
“Fiduciary duties can be reduced to two broad guidelines. The one is Loyalty and the second is Prudence.”
As background, I’ll state what I’m sure the vast majority of you reading this already know: Fiduciary duties can be reduced to two broad guidelines. The one is Loyalty, meaning the interests of a plan and a plan’s participants must take precedence over everything else. The second is Prudence, meaning that every action taken by a plan sponsor must be carefully considered in light of what’s most appropriate for the plan and plan participants.
Although at first glance these may seem simple in reality they are not, as Nevin makes clear by focusing on a few mistakes common in the real world, especially in our experience among smaller employers:
Having a relative handle the company 401(k) plan;
Bundling the plan into an overall banking relationship for fee or interest rate reasons;
Not verifying that the broker or advisor is a specialist in managing retirement plans.
As he says, it may be “painfully obvious” and “self-evident” to anyone who understands the unique and stringent requirements plan sponsors must meet that these, on the surface, indicate potential problems. Sadly, many, many employers don’t have sufficient understanding of just what sponsoring a plan entails. Fortunately, Nevin offers some guidance for avoiding difficulties that can arise from what may seem like good family relations or business practices. They are five principles that, if known and followed, will help even the currently clueless stay reasonably wide of the trouble zone. In particular, we point you to bullet four to emphasize the point:
If you’re a plan sponsor, you’re an ERISA fiduciary.
If you’re an ERISA fiduciary, you have specific legal responsibilities.
ERISA fiduciaries must avoid conflicts of interest.
As an ERISA fiduciary, you’re expected to be an expert – or to hire help that is.
As an ERISA fiduciary, your liability is personal.
These are, as we say, very helpful but, like my morning exercise, may only be enough to keep you from losing ground.
The duty to monitor plan service providers.
In our experience of over 30 years working with employers who are plan sponsors, we have seen dramatic growth in their understanding of fiduciary responsibilities. Increasingly, they are also coming to understand that it is possible and desirable to delegate almost all of their responsibilities for managing the plan to independent experts. This is usually very welcome news!
There is one duty, however, that can't be delegated, that never goes away, and that we add as a sixth principle in Nevin's list: The duty to monitor plan service providers.
Knowledge is one key to success in managing retirement plans and other employee benefits. In our experience, the more plan sponsors know about their responsibilities and the ways, like delegation, they can have experts handle them, the more satisfied they and their employees are with their total benefits offering.
Over the years, we have learned that having a checklist – as well as the wisdom to ask for help from those who know what they’re doing – can provide even the most uninformed plan sponsor with what my morning exercises do for me: Maintain and reinforce a basic level of fitness. Our “Rate My Retirement Plan” (RMRP) questionnaire was created to do just that.
RMRP will provide you with a basic level of guidance so you can decide where and when you need to add some reps, add another routine or hire a trainer. You’ve set the foundation by setting up a plan. Now, build wisely on that and don’t yield any ground!
Ed Lynch is founder and CEO of FPG. He has worked with ERISA-qualified plan sponsors and designated fiduciaries in most aspects of plan development and maintenance since the early 1980s.
Ed founded FPG with the mission to be a leader in the field of employee benefits and the most trusted source of information and evaluation in the retirement plan industry.