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.
