Discretionary Trustee vs. Inv. Mgr. or other fiduciary roles

An old colleague and current competitor of mine, and ours at my firm recently put out a very nice blog post articulating some of the nuances of the trustee role in context vs. other fiduciary roles, Investment Managers and directed trustees.  Certainly worth a quick read, linked here.

http://pentegra.com/expertise/current-thinking/misconceptions-about-the-three-principal-fiduciary-roles-in-a-retirement-plan-the-trustee.aspx

Enjoy!
Jason

Five Steps to Mitigate Fiduciary Risk - or at least minimize it

 Every now and then we see an article of information that isn't saying anything new, but reminds us of some of the basics, i.e. the fundamentals of fiduciary best practices.  Below is an article that does just that, written in an easy to understand way, this article gives employers 5 steps to help mitigate a lot of fiduciary risk.  Thanks to the original publisher, REA & Associates Enewsletter originally authored by Paul McEwan, CPA, AIFA and linked here;

http://www.reacpa.com/five-steps-to-mitigate-your-401k-fiduciary-risk

Five Steps to Mitigate Your 401k Fiduciary Risk

There is so much noise in the marketplace regarding the fiduciary responsibility of plan sponsors it's no wonder people are confused. The confusion starts with who is a fiduciary so it's important to note that fiduciary status is based on the functions performed for the plan, not a person's title.

Your plan's fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan's administrative committee (if you have one) and those who select committee officials. When determining if an individual or an entity is a fiduciary, you need to look at whether or not they are exercising discretion or control over your plan.

Implementing the following best practices will help you mitigate fiduciary risk:
1.     Adhere to a well-defined, deliberative, documented process.

• Include a well-drafted investment policy statement (IPS) that describes the investment selection and monitoring criteria.
• Review annually the performance of the plan's fund line-up to determine if it meets IPS criteria.
• Identify all of your plan's service providers; know and understand their services and fees; monitor performance; and determine if fees are reasonable through objective plan benchmarking.

2.     Identify conflicts of interest. While they are not illegal, they will result in higher plan fees and reduced investment performance over time if not monitored. Any relationship that prevents the plan from being operated in the exclusive best interest of plan participants increases fiduciary risk.

• Beware of financial arrangements between service providers (for example, payments from mutual fund managers to the plan record keeper, TPA or investment advisor) as they are the biggest source of conflicts. Also be aware of personal relationships between plan fiduciaries and plan service providers.
• Use investment advisors in a fiduciary capacity and make sure they document that status in writing. If your advisors don't serve in a fiduciary capacity, be certain they are compensated on a level fee arrangement and know who pays them.
• Seek an independent review of your plan's service providers and investment platform every three to five years. Use an outside consultant, regardless of how much you trust your advisor.

3.     Take full advantage of fiduciary safe harbors provided for in the law.

• Comply with ERISA 404(c) if you allow participants to make investment decisions. There are three compliance areas: 1) investment menu requirements; 2) plan design and administrative requirements; and 3) information and disclosure requirements.
• Implement a Qualified Default Investment Arrangement (QDIA), especially if your plan has automatic enrollment provisions. This is an approved investment selection for participants not making an affirmative investment election. You should also consider moving all participant balances into the QDIA and then allow participants to make affirmative elections. Be sure to comply with all QDIA requirements.  

4.     Establish a fiduciary file that contains documentation of your plan oversight activities listed above, such as:

• All legal documents, including the IPS
• A copy of all service provider contracts and required disclosures
• All investment monitoring reports and prospectuses
• Minutes of all plan committee meetings
• All due diligence performed when selecting service providers
• Annual Form 5500 and audited plan financial statements, if required
• Annual plan activity summaries from service providers   

5.     Purchase fiduciary insurance. This is not an ERISA fidelity bond which is actually required coverage for all employees handling plan assets. Whereas a fidelity bond reimburses the plan for any losses resulting from dishonest acts by employees of the plan sponsor, fiduciary insurance protects the personal assets of all plan fiduciaries due to allegations of breach of fiduciary duties or failure to act prudently in the best interest of participants.

As a plan sponsor, you have the ultimate responsibility for monitoring the performance of the plan service providers your plan hires. You cannot assign or delegate away fiduciary responsibilities to another person or organization; however, you can share fiduciary status with others that may be more knowledgeable about retirement plan operations. If you don't follow the basic standards of conduct described above, you may be personally liable to restore any losses to the plan or to restore any profits made through improper use of the plan's assets resulting from their actions.

Limiting your fiduciary risk as it relates to your retirement plans is only five steps away. Follow them to protect yourself and you plan participants.

Let's Talk About Risk, Man.

Yesterday, I saw a good post from NAPA Net regarding the potential of triggering a Form 5500 type audit.  For those unaware, NAPA is the National Association of Plan Advisors.  I found particularly interesting the list of actual 5500 responses deemed likely to trigger an audit or investigation.  Specifically listed were: 

• line items that are left blank when the instructions require an answer
• inconsistencies in the data disclosed on the Form 5500 schedules
• a large drop in the number of participants from one year to the next
• a large dollar amount in the “Other” asset line on the Schedule H

*Other red flags include hard-to-value investments, non-marketable investments, and consistent late deposits of deferrals.  Included in this category would be Self Directed Brokerage Accounts and Employer Stock.

The reason that this post struck me as interesting has to do with a topic that we discuss often on this blog and when we're out consulting with clients.  Specifically, Risk Mitigation.  Regular readers of this blog know that my firm is a Discretionary Corporate Trustee and that one of the primary reasons we are hired, although not the exclusive one, is to provide relief from exposure to fiduciary liability risk. 

 

Risk mitigation is crucial to our story, but we are consciously aware that of the fact that while fiduciary based law suits are increasing, they are still relatively uncommon in the small plan marketplace where we find most of our clients. 

One area that I've been focusing on when meeting with clients is in risk categorization.  Generally, I view employer (plan sponsor) risk falling into three main areas of concern:

a.       High Risk/Low Probability – This is the risk of law suit.  It is unlikely to occur, but if it does, it will be unpleasant, expensive financially to defend and will have a reputation cost as well.

b.      Low Risk/High Probability – We've found that in 85% of the plans we take over, we catch some kind of administrative, fiduciary or document breach up front and correct them.  These types of issues are likely to pop up from time to time and are a quite common problem.  They are relatively inexpensive to correct but do cause aggravation to clients.   

c.       Medium Risk/Medium Probability – This is the audit risk.  In my opinion, I believe that this is ought to be the biggest area of concern for an employer.  The risk of audit is becoming greater and greater and in the political environment of today, with extreme governmental debt and tax reform coming, this is one area that the government can easily generate revenues in the form of excise taxes, penalties and fines.  It is this risk that is supported by NAPA's posting.

The lesson here for employers is to make sure that 5500's are completed with the same kind of care and attention to detail that a person would use when filling out their IRS 1040.  

The lesson for advisors is two-fold. 

1.) Providing a 5500 review to help clients avoid potential audit trigger's could/should be among your services.

2.) Try coaching clients to eliminate some of those difficult to value assets like employer stock or Self Directed Accounts because those plans are the low hanging fruit from an auditor's perspective.

Finally, some a little self serving here, it would be a good idea for employers to hire a professional fiduciary services provider, like a Discretionary Corporate Trustee.