Fiduciaries for retirement plans are human beings, so they make mistakes.
The most common of those mistakes, while understandable among people unfamiliar with the responsibilities and obligations of a fiduciary, are less so among fiduciaries themselves.
Nevertheless, mistakes are made, and they can be costly not just to the organization for which the erring fiduciary has responsibility, but for the fiduciary personally.
Michael A. Webb, vice president at Cammack Retirement and subject matter expert on nonprofit retirement plan fiduciary issues, offered some insights into the most common of fiduciary errors at a webinar presented earlier in the year by Cammack Health. Webb, together with Eric Paley of law firm Nixon Peabody and Steven Kronheim of TIAA-CREF, ran through a few of the errors that fiduciaries often make.
Here we offer a take on the top 10 errors fiduciaries make, that Webb listed at Cammack Retirement’s knowledge center.
1. Failure to identify all fiduciaries.
Unlikely as it might seem, some retirement plan fiduciaries in an organization get overlooked as such. And that can be pretty embarrassing—particularly when those overlooked fiduciaries themselves aren’t aware of their responsibilities in that line.
It can also be costly if, for instance, they’re called to testify about their fiduciary conduct in court—since, if they’re not aware that they’re fiduciaries, they probably haven’t considered all their actions in light of those responsibilities.
All of these people are fiduciaries:
trustees (except, generally, in the case of 403(b) contracts, which don’t usually use trusts to hold assets)
all people who exercise discretion in plan administration
all administrative committee members
people who choose committee officials (such as board members)
2. Failure to provide proper fiduciary liability insurance.
It might come as a surprise to fiduciaries—particularly if they’re not all that familiar with their duties in that capacity—that they are personally liable for any mistakes they might make as fiduciaries.
It might come as an even bigger surprise if they’re not insured. Directors’ and officers’ coverage or employment practice liability policies might be in effect, but they don’t generally cover liability in the case of an ERISA retirement plan.
And don’t mistake the ERISA fidelity bond for fiduciary coverage, either—it’s only a safeguard against employee fraud or dishonesty, not fiduciary liability.
3. Failure to understand the types of third-party fiduciaries.
Lots of service providers claim to be fiduciaries, but there are grades of and limitations to fiduciary responsibility. If you don’t understand the nuances, you could be on the hook for things you thought were someone else’s bailiwick.
ERISA recognizes three types of fiduciary:
the 3(21) fiduciary, who provides advice but has no discretion over plan assets
the 3(38) investment manager, who decides what to do with plan assets (the plan sponsor is still responsible for oversight of this investment manager)
the 3(16) administrator, who is uncommon but has responsibility for all plan administrative functions, including choosing service providers and managing investments
4. Insufficient training of fiduciaries.
The Department of Labor has recently identified inadequate fiduciary training as an audit issue. And no wonder, if fiduciaries don’t know enough to recognize their own responsibilities.
Not only should new fiduciaries be trained, with refresher courses provided to all fiduciaries, but the training should be documented in meeting minutes and copies of training materials retained and filed.
5. Failure to take appropriate actions and document such actions.
Sometimes fiduciary committees procrastinate on taking action—or do take action, but fail to make a record of it. And either one can leave them open to pricey lawsuits, especially if it’s pretty obvious that something should have been done and wasn’t—or that it can’t be proved to have been done.
Make sure that fiduciaries take action when necessary, and keep records of what they did and when in any meeting minutes so there’s a record of what was done.
6. Spending too much time on plan investments.
Talk about not seeing the forest for the trees. Sometimes, Webb said, committees can focus so tightly on investments that they completely lose sight of other things that must be done—such as following the plan document, making sure that plan contributions are remitted in a timely manner or keeping an eagle-eye on plan expenses and taking steps to keep them under control.
Even if there’s an investment committee whose sole responsibility is investments, make sure that it coordinates with the administrative committee to be sure that nothing ends up undone because each committee thought the other was dealing with it.
7. Spending too much time on the wrong investments.
It’s pretty easy to evaluate mutual funds and even variable annuities, while it takes more time to check out stable value and target-date funds.
But committees are often guilty of spending way too much time looking at mutual funds, despite the fact that plan participants are more likely to put their money into stable value and target-date funds—so the latter get short shrift.
Instead, devoting a whole meeting to stable value and another to TDFs can ensure that all investments get a close enough examination to be sure they’re right for the plan.
8. Failure to follow the plan’s investment policy statement.
Webb described the IPS as a “living, breathing document that should be referenced in every committee meeting.” And while it shouldn’t be so complex that it’s tough to implement, nor so constricting that it hamstrings the committee’s actions, it needs to be followed as a matter of due diligence.
If yours can’t be executed, or executed properly, then maybe it’s time to reexamine it.
9. Failure to properly benchmark plan expenses.
Not only should fiduciaries know how much everything within a plan costs, they should know how that money is paid out and to whom, whether those expenses are in line with the expenses of other comparable plans, and keep records of everything.
With the Department of Labor keeping an eye on such things these days, fiduciaries need to be sure that recordkeepers and/or advisors provide them with transparent data on money paid to all service providers, including revenue sharing.
10. Spending too little time on participant outcomes.
Fiduciaries are probably far more concerned with the mechanics of caring for retirement plans than their outcomes. However, with participants making their own errors in investing, saving, or even withdrawing funds, fiduciaries need to keep a closer eye on how successful plans are in providing employees with the means for a successful retirement.
Paying closer attention to how well or poorly participants are doing within the plan can offer important insights into how well or poorly the plan itself is doing at providing employees with a way to retire without being, or going, broke.