Employer focus
Six best practices for retirement plan investment fiduciaries
Plan sponsors assume significant fiduciary duties once they decide to offer a retirement plan. They must manage their plans with the best interests of plan participants in mind. Section 404(a)(1)(b) of the Employment Retirement Income Security Act (ERISA) also requires that the employer manage the plan with “care, skill, prudence and diligence.” This “Prudent Person Standard of Care” can be a daunting objective, but with a well thought out process it is achievable.
“Hiring or partnering with experts to help meet the ‘prudent person’ requirements for a 401(k) plan doesn’t relieve employers of their fiduciary responsibilities,” says Kent Peterson, director of investment services for Securian Financial Group. “Implementing some fundamental best practices can help you stay on track.”
Securian, which has been in the retirement plan business for nearly 80 years, has identified six core “best practices” for retirement plan investment fiduciaries:
- Maintain an Investment Policy Statement (IPS) with clear goals and objectives for the plan. ERISA Section 402(b)(1) states that, “Every employee benefit plan shall provide a procedure for establishing and carrying out a funding policy and method consistent with the objectives of the plan and the requirements of this title (‘named fiduciary’).”
A well-drafted IPS provides the building blocks for a successful fiduciary process because it outlines clear goals and objectives; defines a prudent process; sets documentation standards; outlines a consistent and repeatable approach for the selection criteria and review of investments; and defines how investments should be evaluated and records the results of these evaluations.
- Construct an investment array in keeping with Section 404(c) ERISA requirements so employees can create diversified portfolios with varying degrees of risk that meet their investment needs. Many employees simply do not have the skill, inclination or time to make well-informed investment decisions.
“At Securian we call these employees the ‘do-it-for-me’ group”, explains Peterson. “Pre-packaged solutions are now popular because they provide do-it-for-me employees with well-diversified portfolios with little effort.”
- Select and monitor a qualified default investment. A Qualified Default Investment Alternative (QDIA) provides relief from the fiduciary liability of investment outcomes for participants who do not make an investment election. A QDIA should be transparent, allow for plan sponsor action and have a reasonable cost. If all three criteria are not met, consider other alternatives.
- Avoid proprietary fund requirements. Some retirement plan providers force plan sponsors to use their proprietary investment options. If there is no freedom to choose, there can be no prudence. Each investment option must be evaluated and included in the plan on its own merits.
- Demand fee transparency and revenue neutrality to ensure that expenses are reasonable and that they are fairly allocated to participants.
Fee transparency allows the plan sponsor to understand all of the expenses participants are paying. “Plan sponsors should demand complete and full disclosure,” declares Peterson.
Revenue neutrality means all investment options generate the same revenue to cover plan expenses. Without revenue neutrality, some participants are paying more than their fair share of plan expenses.
- Construct an investment array appropriate to the skill level of plan participants. Investments with significant volatility or the potential to become illiquid should not be offered in a participant-directed plan unless the participants are highly-skilled investors. If participants do not adequately understand the risks, plan sponsors are exposed to fiduciary liability.
“Managing a retirement plan for the exclusive benefit of employees is complicated, even for those of us who have the expertise,” concludes Peterson. “Plan sponsors should try to use best practices and align themselves with partners who look out for the best interests of the employer and employees.”
Learn 10 ways Securian supports plan sponsors in their fiduciary roles.
This article is being provided for informational purposes. Despite any mention of laws or regulations it is not, and should not be considered, legal advice. Please contact appropriate legal counsel if you have questions relating to the subject matter.
Kent Peterson, director of investment services for Securian Financial Group, has worked in the retirement industry since 1990. He is a Fellow of the Society of Actuaries and holds the Chartered Financial Analyst and Accredited Investment Fiduciary designations. He is also a member of the Advisory Board for the Investment Fiduciary Leadership Council.
