FIDUCIARY SERVICES

Plan sponsors can sharply reduce liability exposure by delegating key responsibilities to an advisor. However, the only way for an advisor to acknowledge fiduciary responsibility for the services they provide to the retirement plan is in writing – in their contract. Written acknowledgment of fiduciary or non-fiduciary status for each service provided should be clearly defined in the advisor’s service contract. Services may include:

Fiduciary services

• 3(38) investment manager
• 404(c) compliance
• Committee meetings
• Development of investment policy
• Investment advice (Participant level)
• Investment advice (Plan level)
• Investment option selection & monitoring
• Plan design & documents
• QDIA selection & monitoring

Non-fiduciary services

• Plan participant communication
• ERISA assistance compliance
• Electronic file cabinet
• Enrollment meetings
• Fee analysis
• Fee benchmarking
• Participant education
• Service provider selection & monitoring
• Sponsor representative training 

Ask the advisor for a copy of their service agreement. Does it describe the services you expect to be performed? Does it describe who will render the services? Does the agreement contain an acknowledgment that the adviser is a fiduciary to the plan?

Committee organization, meeting coordination, and documentation
ERISA mandates that all plan fiduciaries operate as “prudent experts” in making decisions that affect the plan for the benefit of its participants. Considering the rise in lawsuits, the challenge for plan sponsors and fiduciaries is to establish and follow a process that effectively ensures their retirement plan is managed to minimize personal liability. A well-organized and effective retirement plan committee is the cornerstone of successful fiduciary decision-making and organizational risk management for plans of any size.

Small plan sponsors sometimes question why they should empower a plan "committee" when one individual in their company is perfectly capable of making decisions by themselves. Through the use of a committee, the plan sponsor benefits from varying viewpoints, experiences, and information. The use of a committee for fiduciary decision-making can help to reduce risks and ensure that the retirement plan provides benefits to participants effectively and efficiently. Some advisors will help the plan sponsor establish or refine the plan committee which includes choosing and formally appointing committee members, establishing a committee charter, and acknowledging all appointments in writing.

Formal meetings should occur on a regular basis, and the most effective fiduciaries maintain a regular governance calendar. To provide evidence that the plan sponsor has followed a prudent oversight process, meeting agendas should be prepared to detail the items to be discussed and/or acted on, minutes should be kept to document discussions and actions, and all reviewed materials should be maintained in the plan’s fiduciary audit files along with the minutes. Some advisors will organize, lead, and document the plan sponsor’s meetings – including the review and discussion of the plan, preparation of meeting deliverables as well as follow-up minutes. Meeting minutes should identify the members present, what information was reviewed and discussed, any decisions made, and the actions plan along with a time frame and the parties responsible.

The key to minimizing fiduciary liability is to demonstrate “prudent process.” Creating and maintaining a fiduciary audit file is a critical step to being a well-organized plan sponsor. A fiduciary audit file serves as the central location for all plan-related information and helps ensure that the plan sponsor is documenting all processes and meeting ERISA standards. Some advisors will help the plan sponsor to organize and securely archive retirement plan records. While hard copies of information are sufficient, some advisors leverage online storage for plan-related documents in the event of an Internal Revenue Service or Department of Labor audit.

Fiduciary management
On an annual basis, the plan sponsor should examine the health of their retirement plan, identify potential weaknesses, determine corrective action steps and implement prudent processes.

Some advisors apply fiduciary best practices through formal and well-documented processes to help the plan sponsor fulfill their fiduciary responsibilities. In addition to investment management functions, some advisors will review and report on plan operations, administration, design, and regulations. At least annually, the advisor should meet with the plan sponsor to review:

• Investment policy statement
• Total cost analysis and disclosure
• Service providers
• Fiduciary compliance
• Service plan for the coming year
• Regulatory/legislative updates
• Retirement plan trends 
• Plan design
• Fiduciary training
• Education & communication strategies

Fiduciary training
Since the exercise of discretion or control over the plan or plan assets creates a fiduciary relationship, all individuals responsible for making plan decisions should understand and receive education on what the law requires. There is no regulation that requires formalized fiduciary training and education, but, according to the Plan Sponsor Council of America, Department of Labor audits include requests for plan sponsors to provide documentation of training.

Some advisors will educate the plan sponsor on their fiduciary responsibilities and corresponding best practices to improve decision-making and decrease liability. Fiduciary training should be conducted for new members and reviewed annually.

Without question, the number one source of fiduciary liability is paying excessive plan fees. Plan sponsors are often uninformed about the “true” cost of their retirement plan, unknowingly accepting higher fees or being unaware of lower-cost options. In 2012, the Department of Labor introduced regulations that require disclosure of service provider fees to plan sponsors and plan participants. Plan sponsors are responsible to have a process in place to ensure receipt of these written disclosures, and that the plan fees are reviewed and deemed reasonable relative to the services provided. Determining the reasonableness of fees is an explicit fiduciary obligation for plan sponsors under ERISA.

There are some different ways to determine reasonableness, including benchmarking services and expert opinion. However, it is also an accepted prudent practice to employ a competitive bidding process in which proposals are requested from different service providers. To evaluate service proposals in a prudent manner, the plan sponsor should establish evaluation criteria based on the questions asked in the request for proposals. The plan sponsor should focus on a respondent’s capabilities to meet the proposed mandate, its experience, its services, and of course, cost.

Much of the recent litigation involving retirement plans has focused on the appropriateness of plan fees. Issues identified by plaintiffs’ attorneys include:

• Fees and expenses were and are unreasonable and excessive
• Failure to exercise the care, skill, prudence and diligence of a prudent person
• Failure to monitor and control plan expenses, including hard dollar payments and indirect fees
• Failure to implement procedures to properly determine if fees were reasonable
• Failure to timely disclose conflicts of interest

Some advisors help plan sponsors establish an oversight process for benchmarking investment fees and reviewing revenue sharing arrangements. The plan sponsor must ensure that fees are and continue to be reasonable in light of services rendered. It’s important for the plan sponsor to understand, and document, how much is being paid, the parties being paid and the services being provided.

Some advisors recommend that the plan sponsor use an “open-architecture” investment platform in their fund selection process. Within an open-architecture platform, investment funds may be selected without any bias to any particular “family” of funds or a pre-selected group of funds that compensate the advisor. This helps to ensure that the process works in the best interest of the plan sponsor and employees, not generating revenue for the advisor from the “sale” of a particular fund. Advisors or financial service firms that do not offer open architecture usually make more money on their funds or receive extra fees from the funds offered. Open architecture platforms tend to offer high quality, low-cost institutional investments. Higher performing investments at a lower cost leads to more money in the accounts of employees and ultimately, a better future.

There is no requirement that plan costs must be the lowest possible. However, the plan sponsor should be able to prove that they know what they are paying and that there is a documented process being followed to assess and monitor plan fees. The plan sponsor should also identify and eliminate potential conflicts of interest among plan providers and other parties that influence plan decisions.