Common Fiduciary Challenges – Part 1 In my capacity as a professional advisor who consults regularly with plan sponsors, there are some common challenges with plan administration that I frequently encounter when a new client is referred to me. In this article, I will attempt to outline some of the most common deficiencies and what a plan sponsor can do to address them in the most effective manner.
Not having a prudent process to select and monitor investment options
Plan sponsors have a responsibility to ensure that their employees have a competitive mix of investment options to choose from in a defined contribution plan. In order to make certain that plan sponsors are able to meet this requirement in an efficient manner, it is useful to have a written process outlining how investment options will be chosen and monitored. An excellent tool with which plan sponsors can use to detail this prudent process is an Investments Policy Statement (IPS).
An Investments Policy Statement details how the plan will select and monitor the investment options that are available for participants to choose from. The IPS will typically detail the criteria with which these investment options will be reviewed. A typical selection criterion may include:
- Performance relative to a manager's peer group over a certain period of time
- Performance relative to an appropriate index
- A fund's expense ratio relative to it’s peer group
- Various methods of evaluating a funds risk adjusted returns such as Sharpe Ratio or Alpha
- The tenure of the manager or team of managers for the fund
- Style consistency - do the underlying holdings of the fund match the stated investment style of that portfolio?
There are many other criteria that are reasonable and could be used to evaluate a particular investment option. Some criteria that plan sponsors may want to consider included in their evaluation process can be found in another article on this blog - Selecting and Monitoring Mutual Funds. The key is to have a reasonable or prudent process and to follow that process.
Not following your stated process for evaluating investment options
Sometimes plan sponsors will have a reasonable, prudent process outlined for selecting and monitoring investment options. Many times, plan sponsors have even prepared detailed Investment Policy Statements when their retirement plan was established. However, if you're going to have a written process for evaluating managers, it's important that you follow the stated process and , are able to document that you've done so.
Plan fiduciaries must monitor their plans investment options on a regular and ongoing basis. This can be challenging for plan sponsors simply because of how busy the typical executive in a small or midsized company is. Regrettably, being busy does not eliminate the responsibility.
Not documenting that you have followed your stated process for evaluating money managers
As with many things in business, particularly from a regulatory standpoint, if it's not written down it didn't happen. As a plan sponsor, you may at some point be challenged about an investment decision that you made. If that time ever comes, being able to demonstrate in writing, that you have followed a prudent process may be critical.
Unfortunately many times, plans sponsors who have carefully monitored the performance of their plans investment options have no evidence that they have in fact done so. Retirement plan fiduciaries are therefore encouraged to maintain records confirming decisions that they made with respect to plan investment options. Records could include due diligence reports prepared for investment options in the plan or minutes from investment committee meetings.
The key is, being able to prove that you did what you said you were going to do from an investment monitoring standpoint? Are you able to prove that you followed your prudent process?
In part two of this series, we will continue to explore some common fiduciary challenges and how plan sponsors can most easily address them. A sample of an Investment Policy Statement, which we use in our practice, can be found at this link on our Resources page. We have also provided a link to a sample Due Diligence Report that has been designed to coordinate with our sample Investment Policy Statement.
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Dean Piccirillo offers insurance products through HBK Sorce Insurance LLC. Investment advisory services are offered through HBK Sorce Advisory LLC d/b/a HBKS Wealth Advisors. Mr. Piccirillo is not able to transact business in a state that he is not licensed or registered.
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