1. Understanding the role of a fiduciary
Performing the role of a plan fiduciary necessitates acting in participants’ best interests, following legal requirements, and demonstrating care, skill, prudence, and diligence in decision-making and oversight.
Plan fiduciaries must remain up to date with the laws and regulations surrounding retirement plans, and the various regulatory interpretations of them, including the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code (IRC), Department of Labor (DOL) regulations, and Secure 2.0.
Your core responsibilities
- Ensuring that plan documents, such as the summary plan description, are current and accurate
- Filing all required government reports (such as Form 5500)
- Periodically and routinely convening, and maintaining thorough records of, committee meetings, plan administration and investments
- Overseeing investment options by selecting and monitoring options that meet strict fiduciary standards
- Monitoring changing market and macroeconomic conditions that could impact plan options
2. Evaluating fiduciary options thoroughly
Even when delegating, a plan sponsor retains the obligation to conduct proper oversight of providers. When establishing what specific fiduciary services you require, take into consideration your own capabilities and risk tolerance, and then ask providers about their capabilities, credentials, services, fees, and service levels for performing, monitoring, and reporting on, such services to you.
Some plan sponsors hire administrative fiduciaries to handle essential tasks like compliance, reporting, and recordkeeping per all governing laws and regulations. These services fall under section 3(16) of ERISA. Others choose to hire a 3(38) ERISA discretionary investment manager or a 3(21) ERISA co-fiduciary investment advisor to provide an array of services including selection and monitoring of plan investments.
The two types of fiduciaries defined under ERISA are:
- Discretionary Investment Manager (also known as ERISA 3(38) Investment Manager): Acts as the sole investment manager for the plan with the power to manage, acquire, or dispose of any assets of the plan.
- Co-Fiduciary Investment Advisor (also known as ERISA 3(21) Co-Fiduciary Investment Advisor): Act as a co-fiduciary that renders investment advice for a fee or other compensation, including assistance with the Investment Policy Statement, selection, and monitoring of plan investments as well as investment performance and analytics. The plan sponsor retains the ultimate discretionary responsibility for making investment decisions, changes, and investment actions.
Vetting multiple providers and obtaining references from current or past clients is highly recommended when evaluating the best option for your plan. When assessing fiduciary service providers and options, our experience has been that plan sponsors will want to consider eight factors:
- Experience with retirement plans
- Industry knowledge
- Proven track record of success
- Required credentials
- Reasonable and transparent fees
In addition, fiduciary service providers should be able to clearly articulate the specific services they will provide, their responsibilities, the reports and communications they will deliver, and their approach to investment selection and monitoring. Clarity on their process and deliverables is critical.
3. Monitoring plan investments and fiduciary
Plan sponsors are not responsible for ensuring that plans yield the highest possible investment returns nor are they required to select a service provider with the lowest cost. However, sponsors and their fiduciaries are responsible for offering appropriate investment options and having well-documented processes for all reviews and decision making. It includes selecting diverse investment options, engaging service providers that are reasonably priced and have a track record of performing well, providing participants with clear and understandable information about their plan choices, and ensuring that fees and expenses associated with the plan are reasonable and transparent.
Benchmarking investment performance helps to show whether your plan is achieving appropriate returns within a reasonable and prudent risk framework. Competent investment monitoring and reporting requires specialized understanding of markets, expense ratios, and net returns. You should also compare the performance of your plan’s investment options against standard benchmarks and peer groups to determine whether any necessary changes or corrective actions are necessary or appropriate.
In addition, benchmarking your third-party service providers against industry standards and competitors is essential for prioritizing your plan participants’ interests. Per the Department of Labor, at least every three years, you should examine the specific services provided, fees charged, reports and communications delivered, and overall service standards to confirm that your service provider is properly fulfilling their responsibilities.
4. Conducting reviews and documentation
Fiduciary review and oversight are continuing obligations. Sponsors should start by planning a regular review process and establishing a clear and consistent documentation process that outlines the reviews conducted, issues identified, and corrective actions taken. This level of diligence, oversight, and documentation is critical in mitigating liability and demonstrating your commitment to the highest fiduciary standards.
Tip: Keeping open lines of communication between you and your plan fiduciaries results in the most constructive degree of transparency. Maintaining an ongoing working relationship enables comprehensive governance and oversight. As part of this process, document all conversations with your provider.
Plan fiduciaries play an essential role in the governance, risk management, and oversight of retirement plans. Leaders in human resources and finance must fully comprehend their responsibilities, evaluate fiduciary options thoroughly, consistently monitor performance through benchmarking, and take corrective action as needed.
Fiduciary governance should be a top priority; failing to fulfill your fiduciary obligations can lead to negative consequences. Consider consulting retirement plan specialists, if needed, to ensure proper governance. Comprehensive oversight, documentation, communication, and benchmarking enable strong governance and risk management of your plan.
An experienced retirement plan advisor can help you navigate ERISA regulatory requirements and create a plan design to improve the participant experience. Our comprehensive approach can help you satisfy fiduciary duties and reduce your administrative burden. Connect with Wilmington Trust today to learn more.