During the past 12 months, most everyone has experienced unprecedented market volatility and heard about the hardships that may be caused by the falling values of retirement plans.
It shouldn't be surprising, then, to learn that many plan sponsors are taking a closer look at the retirement plans they provide for their employees.
But where should they start when undertaking this task? Most professional financial advisers would agree that the plan sponsor should first have a clear understanding of their fiduciary responsibilities.
The guidelines put out by the U.S. Department of Labor make it very clear that if retirement plan sponsors do not adhere to their fiduciary responsibilities, they may be personally liable when losses occur. Three good steps to start with are understanding the plan; developing guidelines and processes; and monitoring the plan.
Study retirement plan specifics
A plan sponsor needs to thoroughly understand the plan that has been adopted. There may be many individual service providers assisting with the plan, but the responsibility of understanding and fulfilling the terms can never be delegated completely. There are several expectations to keep in mind.
Specifically, according to the Department of Labor, "Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses. In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with the Employee Retirement Income Security Act. They must also avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefits parties related to the plan, such as other fiduciaries, service providers, or the plan sponsors."
If the plan is not consistent with ERISA, counsel should be sought in order to amend the plan's terms.
Policies and procedures
Plan fiduciaries must establish processes for themselves as fiduciaries and set guidelines for those who work with the plan. Clearly defined roles and responsibilities will help ensure the plan is properly administered. This step also will help ensure that required plan filings or amendments will be finished on time.
To make sure the plan is properly diversified and offers the necessary investment choices, it is crucial to adopt an investment policy statement. An IPS provides a clear road map to the standards used when selecting the plan's investment choices and the ongoing process to determine when a fund should be removed and/or another fund added. The IPS also should outline who is responsible for monitoring and reporting the performance to the plan's fiduciaries.
Keeping tabs
Once guidelines and processes have been developed and implemented, ongoing monitoring is necessary. Again, the Labor Department makes it clear that plan fiduciaries are not only responsible for understanding plan costs, but also for whether it is prudent to pay such costs given the levels of service received. Plan sponsors have an obligation to monitor additional services and their cost structures as they become available. There is pending legislation that will make plan costs much more transparent, but until then, the plan fiduciaries are responsible.
Plan fiduciaries should be certain they understand the roles of all service providers and whether those service providers are willing to share any level of fiduciary responsibility with the plan sponsor. The plan sponsor must also understand the various means by which service providers are compensated and how that might impact the plan's cost. Given the past year's market volatility, it has never been more important to understand the costs of a plan and how those may impact the return for the plan's employees. A good review will help all parties understand the plan in place.[[In-content Ad]]Jack Thurman, CIMA, is principal and president of BKD Wealth Advisors in Springfield, a subsidiary of accounting firm BKD LLP.
