As we have seen the up and down gyrations that governed the direction of the markets slip slowly over our investment horizon, perhaps we should resume our conversations regarding our client -- the plan sponsor.
While debate rages on regarding who is and who is not a fiduciary, there is no doubt our plan sponsors are, unequivocally, fiduciaries. Among other responsibilities to their business and their employees, a plan sponsor is required to make only prudent decisions regarding the plan's investment lineup and is required to make sure plan expenses and fees are reasonable.
And it might be prudent for you to remind your plan sponsor that should they fail to comply with the requirements, as defined by ERISA Section 502(a), they may be held personally responsible for compensating a single participant for any demonstrable fiduciary breach.
So, what are you, as advisor to the plan going to do to insulate your client, the plan sponsor? Educate them as to the potential pitfalls looming for not adhering to the parameters of ERISA. And here are the first five 'commandments' for your (and their education).
First commandment: Have a plan investment committee.
There is no stipulation in ERISA that decisions regarding plan participants (and their beneficiaries) be made solely by the plan sponsor. Plan investment committee members should be made aware they are considered to be fiduciaries and subject to the same professional and personal liability as the plan sponsor. And that will (almost) ensure that the investment committee is motivated to perform their fiduciary role.
Second commandment: Have plan investment committee meetings. And take good notes.
Having a plan investment committee is one thing; actually having periodic committee meetings is another. There must be, to satisfy the stipulations of ERISA, regular meetings of the investment committee to ensure (or at least give the appearance) the activities of the plan are being managed prudently and properly. And have someone take and then transcribe notes from these meetings, which will serve to validate the decision-making process of the investment committee while providing some insight and input as to how those decisions developed.
Third commandment: Have a written investment policy statement.
While not required by either ERISA or the Department of Labor, the (usually) first question posed when a plan audit is being conducted is what are your written rules for adding or subtracting an investment option from your plan?
Having an investment policy statement, carefully drafted by qualified legal counsel, which is adhered to by the investment committee, is protectively and proactively prudent.
Fourth commandment: Follow the criteria created in the investment policy statement.
Much like having a plan investment committee that never meets, having an investment policy statement that is not followed is foolhardy. If the investment policy statement calls for pruning an investment option from the plan once it underperforms for a stipulated period, and the option remains and participants continue to invest ... see the fifth commandment.
Fifth commandment: Be cost conscious
ERISA requires that a fiduciary (and that includes both the plan sponsor and the members of the plan investment committee) is required to monitor that services provided to the plan -- from third-party administrator to plan advisor -- are both necessary and reasonable.
So, perhaps it would be prudent to include periodic -- every three to five years -- reviews of plan provider services and fees are reasonable. Stay tuned for the next five commandments.
