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The 5 Simple Truths
The 5 Simple Truths Every Retirement Plan Sponsor Should Know
Being a Retirement Plan Sponsor carries a lot of responsibility. As the designated point person of your organization, it’s up to you to select an advisor, the plan provider, and the features and benefits of the plan that may ultimately help your employees achieve the retirement lifestyle they hope for.
One of the elements of managing a retirement plan that often catches Plan Sponsors by surprise is the duty required of them as Plan Fiduciaries. While being a Plan Fiduciary can sound overwhelming and complicated, it doesn’t have to be. By focusing on the right things, you don’t have to know everything. You can also delegate a portion of your responsibilities to outside parties, which you’ll learn more about here. Let’s break down The 5 Simple Truths you should know to help you succeed as a plan fiduciary.
1. Yes, It's True, You are a Fiduciary
A fiduciary is someone either designated by the plan as a “named fiduciary” or who is considered one based on the actions they perform as a part of their job. The Employee Retirement Income Security Act of 1974 (ERISA) classifies an individual as a fiduciary if they:
- Exercise any discretionary authority or control over the management of the plan or plan assets.
- Provide investment-related recommendations for a fee or other compensation or has the responsibility to do so.
- Have any discretionary authority or responsibilities in the administration of the plan.
2. You Can Delegate Your Fiduciary Responsibilities
Delegation to an investment fiduciary can help Plan Sponsors in a meaningful way.
- Delegating investment responsibility to outside professionals can protect a plan sponsor from liability.
- If you hire a 3(38) Investment Manager, you can no longer be held responsible for specific investment decisions.
- Through delegation, you can minimize risk related to the plan and potentially maximize wealth for plan participants.
3. You are Required to Understand All Plan Fees
While the law doesn’t prescribe a specific level of fees, it does require them to be “reasonable.” You must know what you’re paying for and how these costs compare with the broader market.
There are a lot of different fees to be aware of, including explicit and implicit fees like administrative costs, investment costs, recordkeeping fees, custody fees, trustee fees and brokerage fees.
Most litigation is focused on plan fees.
4. Ask the Right Questions and Benchmark Your Service Providers
It’s important to know who your service providers are, whether it’s an insurance company, investment professional, Record Keeper, or Third Party Administrator (TPA), you should know who to contact with specific plan-related questions.
Benchmarking is one of the most important things you can do to ensure the plan is delivering on its promise to you and your organization. While it requires effort, it’s not difficult. Plan benchmarking may result in lower costs and provide an increase in the level of service you receive. Importantly, it may also offer a potential reduction in fiduciary exposure.
Proper benchmarking involves a review of all fees, investments, and plan provisions against similar types of plans and those within your industry.
5. Maintain an Investment Policy Statement
An Investment Policy Statement (IPS) makes it easy to keep track of plan specifics for easy reference. The IPS should include the following sections:
- Evaluation of the specific needs of the plan and its participants
- Investment objectives and goals of the plan
- Definition of duties and responsibilities of all parties involved
- Standards and benchmarks of investment performance to which the 401(k) plan assets are compared
- Policy and procedures related to hiring, monitoring, and replacement of investment managers
The right partner(s) may help you better fulfill your fiduciary responsibilities, reduce your liability, lower your plan costs, and provide the potential for better retirement outcomes for your employees.