Tuesday, August 18, 2009

IMHO: “To Do” List


Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated.

In my experience, most who find themselves in that role (see "IMHO: Duty Bound") I think do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job, and the purpose of this column—and the one will follow it next week—is to focus on those issues that come up regularly in my discussions with plan sponsors, advisers, and industry experts.

…This is a list compiled based on three decades of experience working with retirement plans; numerous conversations with providers, plan sponsors, regulators and advisers; as well as a review of documented compliance shortfalls.

… This listing is a combination of the things that you must do and things that you do not have to do—but that, if done, would keep you and your plan(s) in good stead. …

1. Not having a plan/plan investment committee

ERISA only requires that the named fiduciary … make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA … requires that, if you lack the requisite expertise, you enlist the support of those who do have it.…

… Make sure your committee members add value to the process. (Hint: Once they discover that ERISA has a personal liability clause, casual participants generally drop out quickly.)

2. Not HAVING committee meetings

Having a committee and not having committee meetings is potentially worse than not having a committee at all. … [But] if there is a group charged with overseeing the activities of the plan, and that group doesn't convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires.

3. Not keeping minutes of committee meetings

… [A] written record of the activities of your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.

More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted—properly documented, of course.

4. Not having an investment policy statement

… [The] reality is that the law does not require one…. Of course, if the law does not specifically require a written investment policy statement (IPS)—… ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should find it easier to conduct the plan's investment business in accordance with a set of established, prudent standards ….

It is worth noting that, though it is not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. … [If] there is one thing worse than not having an investment policy statement, it is having an investment policy statement—in writing—that is not followed.

5. Not removing “bad” funds from your plan menu.

Whether or not you have an official IPS, you are expected to conduct a review of the plan’s investment options as though you do. Sooner or later, that review will turn up a fund (or two) that no longer meets the criteria established for the plan. That’s when you will find the true “mettle” of your investment policy; do you have the discipline to do the right thing and drop the fund(s), or will you succumb to the very human temptation to leave it on the menu (though perhaps discouraging or even preventing future investment)? … [How] can leaving an inappropriate fund on your menu—and allowing participants to invest in it—be a good thing?

Next week - the rest of the list…

Nevin E. Adams

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