minimizing fiduciary risk for retirement plan sponsors
Ryan Franklin, CFP, CPA/PFS, and Justin Fisher, CFP, AIFA, MBA, Financial Advisors, Moss Adams Wealth Advisors LLC
Many successful food and agriculture businesses spend a great deal of time developing a strategic plan and adapting it to their changing economic and competitive landscape as well as controlling expenses and managing the risks that could seriously impact their profitability. Why then, when it comes to retirement plans, are these same activities often overlooked by the retirement plan fiduciaries?
A retirement plan is often overseen by a finance committee or board of trustees that’s composed of a company’s CEO or owner, CFO, other key members of management, and occasionally a retired shareholder. In successful companies, these committee members are working hard each day in their traditional roles, leaving little time to proactively manage the organization’s retirement plan. Even so, retirement plan fiduciaries are still required to carry out certain duties under the Employee Retirement Income Security Act and US Department of Labor (DOL) regulations. A failure to exercise these duties can expose not only the company but also the individual fiduciary to potential litigation. Therefore, it’s important to understand what these duties include and how best to fulfill them.
Duties for Plan Fiduciaries
The DOL requires that plan fiduciaries adhere to certain standards of conduct, including:
- Acting solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents
- Diversifying plan investments
- Paying only reasonable plan expenses
The DOL highlights acting prudently as a central responsibility. This requires plan fiduciaries to have expertise in areas such as investment selection or hire outside help to assist with this function. The process of hiring an outside advisor is a major area where the other four standards overlap. Fiduciaries need to make sure outside advisors charge reasonable fees, offer reasonable diversification, avoid creating a conflict of interest, and were selected in a manner that is consistent with plan document requirements.
Best Practices for Fiduciaries
Fortunately for plan fiduciaries, there’s a great deal of literature that’s useful in carrying out these duties. We’ve highlighted five best practices that can help you lessen your fiduciary risk and improve the quality of your retirement plan offering:
1. Understand the laws and your duties. Simply put, the investment committee members must understand what’s required of them. It’s critical that each committee member is comfortable with his or her role and possesses the skills and training to prudently make decisions that are in the plan participants’ best interests. An acute focus on these roles and responsibilities can help create a culture within your organization that supports overall fiduciary excellence.
2. Document everything. Documentation is your only way to show the DOL that you’re indeed fostering a culture of overall fiduciary excellence. It’s important to maintain all plan documents and meeting minutes so they’re up to date and accessible.
3. Hire qualified and independent expertise. If hiring an outside advisor to help with investment selection (and possibly plan design), it’s critical that he or she is independent. Documenting the hiring process will help you avoid conflicts of interest and confirm that the plan document is being respected. Find out your advisor’s fiduciary status in respect to the plan and what specific skills and training he or she has.
4. Prepare an investment policy statement (IPS). This key document will provide a framework for how your plan’s investments are to be managed. An IPS outlines the process that your plan will follow in selecting, monitoring, and replacing funds as necessary. It’ll also ensure that you’re offering prudent diversification to employees and their best interests are given primary consideration.
5. Understand and monitor plan expenses. You must understand your expense structure and take active steps to evaluate whether it’s reasonable. You don’t need to have the lowest possible fees, but you do need to document that you’ve evaluated what your plan is paying and how it’s reasonable compared to alternatives in the market. You should also understand whether there are any revenue-sharing arrangements associated with your plan’s investments and how they might affect investment returns of plan participants. Lastly, you should be aware that there are significant changes to the fee disclosure rules affecting plan participants coming in April 2012; talk to your advisors about how this will affect your future plan reporting.
Retirement plans exist for several reasons, including attracting and retaining talented workers, minimizing income taxes, and helping employees provide for their future financial security. By following the best practices above and taking an active role in overseeing your company’s retirement plan, you can foster an overall culture of fiduciary excellence that will be a great benefit to your employees.
Ryan Franklin works with owners of closely held food and agriculture businesses to develop their financial plans, manage their assets, and help achieve their investment and business goals.
Justin Fisher works closely with business owners and high net worth individuals and their families to prioritize their unique goals and customize integrated wealth management strategies.
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