'Looking' Class

Next week PLANSPONSOR and PLANADVISER will open nominations for our Retirement Plan Adviser of the Year awards.

Each year we receive a number of inquiries from advisers about the awards, and many of these fall into a category I tend to think of as “exploratory”—feelers as to what we are looking for.

Well, at its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed at all: advisers who make a difference by enhancing the nation’s retirement security, through their support of plan sponsor and plan participant information, support, and education. And, since its inception, we’ve focused on advisers who do so through quantifiable measures: increased participation, higher deferral rates, better plan and participant asset allocation, and delivering expanded service and/or better expense management.

A Different World

Of course, the world has undergone much change since we first launched those awards, and advisers now have an expanded array of tools at their disposal to make those results a reality—legislatively sanctioned automatic enrollment, contribution-acceleration designs, qualified default investment alternatives, and a broadly greater emphasis on transparency and disclosure of fees. These steps have been good for our industry, great for participant retirement security and, IMHO, have served to raise the bar for our award at the same time.

So, what will we be looking for this year? Well, last month I wrote a column outlining advice I have given to plan sponsors over the year about choosing an adviser. Of those seven areas (see “IMHO: ‘Right’ Minded”), several fall into what I would consider to be a personality match between plan sponsor and adviser—important to a productive working relationship, but not within the scope of our award.

Standards Setting

On the other hand, there are areas—critical areas—that absolutely apply. Now, I’m only one judge (albeit, IMHO, an influential one) on the panel, but advisers I am looking for:

Have established measures and benchmarks for plan success. Those benchmarks should include the measures noted above: participation, deferral rates, asset allocation. If you can’t tell me what your targets are and how your client base stands in relation to those targets, IMHO, you’re using the “wrong” benchmarks. I’m also interested in advisers who not only use those as a matter of course in running their business, but who develop them in partnership with their plan sponsor clients—and who regularly and routinely communicate results to their plan sponsor clients.

Fully and freely disclose their compensation. I’m frankly a lot less concerned with how you get paid than that your plan sponsor clients know what they are paying for your services.

Work at staying current on trends, regulations, and product offerings. The best advisers read, attend conferences and/or informational webcasts, have attained (and maintained) applicable designations, and commit to a regular course of continuing education during the course of the year. This business is constantly changing; if you’re not constantly learning, you—and your clients—are being left behind.

Encourage and inspire their clients. Client referrals have always been a key element in our award, and as the overall quantitative standards rise, the significance of the qualitative element afforded by client references (and award nominations) will almost certainly increase. How often do you talk with your clients? How often do you visit? How—and how often—do you communicate with them regarding regulatory and legislative changes? You know what you’re trying to do for your clients—do they?

Are willing to accept fiduciary status with the plans they serve. This is an area our judges have debated vigorously over the years. I’ll admit some great advisers have been barred from accepting fiduciary status by forces they don’t control. I’m not (yet) saying you have to be willing to accept fiduciary status in order to get my vote, but it’s a factor—and, IMHO, an increasingly important one.


We launched our Retirement Plan Adviser of the Year award in 2005 to acknowledge "the contributions of the nation's best financial advisers in helping make retirement security a reality for workers across the nation." It has always been our goal to bring to light the very best practices of the nation’s very best advisers (and adviser teams), and in so doing, to help set—by their example—new standards for excellence in dealing with workplace retirement plans.

That’s what we’re looking for—and looking forward to acknowledging—this year as well.

—Nevin E. Adams, JD

P.S. Information about the nomination form/process will be published in the September 8 issue of PLANADVISERdash.

“To Do” List—Part 2

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. In my experience, most who find themselves in that role (see “IMHO: Duty Call”) do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job. In this week’s column, we’ll touch on the rest of my “10 things you’re probably doing wrong” list:


6. Thinking your plan qualifies for 404(c) protection—and misunderstanding what that means.

Any number of studies suggest that many, perhaps most, plan sponsors think their plan meets the standards of ERISA 404(c ), a provision that ostensibly shields them from being sued for participant investment decisions, so long as certain conditions are met.

On the other hand, industry experts are nearly uniform in their assessment that very few, perhaps no, plans meet those standards (though the courts have been somewhat more liberal in their application). So, even if you think your plan does comply—check. And even if your plan does comply, understand that, while 404(c)’s shield may offer some protection against an individual participant suit, it offers no insulation against a participant suit predicated on an inappropriate investment option. Remember, too, that the DoL thinks you’re responsible for every participant investment decision except those behind 404(c)’s “shield.”

7. Depositing contributions on a timely basis.

The legal requirement for when contributions must be deposited to the plan is perhaps one of most widely misunderstood elements of plan administration. Unfortunately, a delay in contribution deposits is also one of the most common flags that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst case situation (the 15th business day of the month following) to be the legal requirement. It is not.

8. (Not) monitoring providers on a regular basis.

In some sense, we all “monitor” the performance of plan providers all the time. Is the Web site available when people try to access it? Do checks and statements arrive on time? Are the balances displayed accurate? The reality is that, for most of us, no news is seen as “good” news. After all, if the answer to any of those questions was “no,” we’d not only know about it, we’d be complaining about it (after fending off our own set of complaining phone calls). Odds are that you have a very full-time job dealing with the things that are “broken”—why go looking for trouble?

However, relationships with providers are like any other relationship—we all slip into “ruts” of complacency—and the best way to keep that new customer “honeymoon” feeling alive is to do something as simple as ask your current provider for a regular service review. At least once a year—no matter how well things are going—you should determine if your plan has access to the new services that have come online since you converted; that you are getting the advantages of the most current thinking about costs and fees; and how your plan’s participation, deferral, and asset diversification stack up. And every three to five years (sooner if there are problems, of course), you should go through a formal request for information (RFI) or request for proposal (RFP) process—on your own, or with the help of an adviser (who doubtless has more experience with such things).

Remember also that the DoL says that, “Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.”

9. Not following the terms of the plan document.

Plan documents are, after all, legal documents and can skirt the fringes of readability. Retirement plans develop certain patterns or routines—the way things are handled—that may not, over time, remain consistent with the terms of the plan. Particularly if you are using a plan document prepared by a provider (or, worse, an ex-provider) that may well accommodate that provider’s approach, but may not match (or may not have kept up with) how you actually administer the plan. It is a good idea to do a document/process “audit” every couple of years; don’t assume that “the way we’ve always done things” is supported by the legal document governing your plan.

10. Not realizing who is a fiduciary—and what that means.

The first thing to understand is who a plan fiduciary is, and to understand that the “test” isn’t what you call yourself (or, in some cases, what you avoid calling yourself), but your ability to control and influence plan assets. A fiduciary is any person or entity named in the plan document (e.g., the plan sponsor and trustee); any person or entity that has discretionary authority over the management of a retirement plan or its assets (all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee—if it has such a committee—and those who select committee officials); and any person or entity that offers investment advice with respect to plan assets, for a fee.

Remember too, that the authority to appoint a fiduciary makes you a fiduciary—and that hiring a “co-fiduciary” does not make you an “ex” fiduciary.

If you are a fiduciary, and you feel that you lack the expertise to make those decisions, you will of course want—and, in fact, are expected—to hire someone with that professional knowledge to carry out the investment and other functions.

Finally, remember that, IMHO, you’re more likely to get sued for not doing something you should be doing than for doing something you shouldn’t be doing.


—Nevin E. Adams, JD

You can find more information on fulfilling your fiduciary responsibilities at the Employee Benefits Security Administration’s (EBSA) Web site HERE

"To Do" List

10 Things You’re (Probably) Doing Wrong—or Not Doing Right—as a Plan Fiduciary

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. In my experience, most who find themselves in that role (see “IMHO: Duty Bound”) I think do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job, and the purpose of this column—and the one will follow it next week—is to focus on those issues that come up regularly in my discussions with plan sponsors, advisers, and industry experts.

A couple of disclaimers up front: first, if you’re taking the time to read this, odds are you are probably doing a better-than-average job as a plan fiduciary. Second, you may well be able to identify things that are not on this list. This is a list compiled based on three decades of experience working with retirement plans; numerous conversations with providers, plan sponsors, regulators and advisers; as well as a review of documented compliance shortfalls.

Note also, however, that there is frequently a difference between doing all that the law requires and doing everything that you could do. This listing is a combination of the things that you must do and things that you do not have to do—but that, if done, would keep you and your plan(s) in good stead. I hope you find this list informative, and that you draw insight and comfort from its contents, as well as a reminder of the awesome responsibilities you have as a plan fiduciary.

1. Not having a plan/plan investment committee

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it.

You may well possess the requisite expertise to make those decisions—and then again, you may not. But even if you do, why forego the assistance of other perspectives?

However, having a committee for having a committee’s sake can not only hinder your decisions— it can result in bad decisions. Make sure your committee members add value to the process. (Hint: Once they discover that ERISA has a personal liability clause, casual participants generally drop out quickly.)

2. Not HAVING committee meetings

Having a committee and not having committee meetings is potentially worse than not having a committee at all. In the latter case, at least you ostensibly know who is supposed to be making the decisions. But if there is a group charged with overseeing the activities of the plan, and that group doesn’t convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires.

3. Not keeping minutes of committee meetings

There is an old ERISA adage that says “prudence is process.” However, an updated version of that adage might be “prudence is process—but only if you can prove it.” To that end, a written record of the activities of your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.

More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted—properly documented, of course.

4. Not having an investment policy statement

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement, the reality is that the law does not require one, and thus, many plan sponsors—sometimes at direction of legal counsel—choose not to put one in place. Of course, if the law does not specifically require a written investment policy statement (IPS)—think of it as investment guidelines for the plan—ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

It is worth noting that, though it is not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. And therein lies the rationale behind the counsel of some in the legal profession to forego having a formal IPS; because if there is one thing worse than not having an investment policy statement, it is having an investment policy statement—in writing—that is not followed.

5. Not removing “bad” funds from your plan menu.

Whether or not you have an official IPS, you are expected to conduct a review of the plan’s investment options as though you do. Sooner or later, that review will turn up a fund (or two) that no longer meets the criteria established for the plan. That’s when you will find the true “mettle” of your investment policy; do you have the discipline to do the right thing and drop the fund(s), or will you succumb to the very human temptation to leave it on the menu (though perhaps discouraging or even preventing future investment)? Oh, and make no mistake—there will be someone with a balance in that fund. Still, how can leaving an inappropriate fund on your menu—and allowing participants to invest in it—be a good thing?

Next week – the rest of the list…

- Nevin E. Adams, JD

Duty 'Calls'

When it comes to qualified retirement plans, there are three kinds of people: people who are fiduciaries and know it, people who aren’t fiduciaries and know it, and people who are fiduciaries and don’t know it.

Now, for the most part, those in the first category are in pretty good shape. Oh, there are a plethora of ways in which a fiduciary can fail to uphold his or her responsibilities under the Employee Retirement Income Security Act (ERISA)—but, in my experience, if you’re at least trying to do the right thing(s), and taking the time to document that effort, you’re in good shape. Still, even those who are trying to do the right things—and who embrace that role—don’t always fully appreciate the implications.

The second category mostly tends to include those folks or firms that provide services to the retirement plan fiduciaries. Most enjoy that status because they don’t technically have any authority to do anything on their own; they just help those who do know what to do. Of course, there are some who think they are in the second category—who are actually in the third category.

As for that third category—well, if your plan sponsor clients are there, IMHO, it means you aren’t doing your job as a plan adviser. Here are seven things that every plan sponsor should know about being a fiduciary:

If you’re a plan sponsor, you’re a fiduciary.

Fiduciary status is based on your responsibilities with the plan, not your title. If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. If you’re not sure—and are worried that you aren’t sure—there’s a good chance you are.

Note that every plan must have at least one fiduciary (either a person or an entity) specifically named in the written plan document, a “named fiduciary” that is either identified by office or by name.

Of course, if there is a title less well-understood than “fiduciary,” it may well be “plan sponsor.”

For the very most part, you can’t offload or outsource your fiduciary responsibility.

ERISA has a couple of very specific exceptions; more precisely, ways in which you can limit—but not eliminate—your fiduciary obligations. One exception has to do with the specific decisions made by a qualified investment manager—and, regardless, you remain responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan. The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA’s 404(c). Here also, even if your plan meets the 404(c) criteria (and it is by no means certain it will)—you remain responsible for the prudent selection and monitoring of the options on the investment menu from which they are selecting (1).

Outside of these two exceptions, you’re essentially responsible for the quality of the investments of the plan—including those that participants make.

If you’re responsible for selecting those who are on the committee(s) that administer the plan, you’re a fiduciary. If you are able to hire a fiduciary, you’re (probably) a fiduciary.

The power to put others in a position of power regarding plan assets is as critical as the ability to make decisions regarding those investments directly.

Hiring a co-fiduciary doesn’t keep you from being a fiduciary.

Moreover, all fiduciaries have potential liability for the actions of their co-fiduciaries. If a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals that breach, or does not take steps to correct it, both are liable.

You have personal liability as an ERISA fiduciary.

That’s right, the legal liability is personal (you can, however, buy insurance to protect against that personal liability—but that’s not the fiduciary liability insurance you may already have in place).

You may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets.

Once you’re a fiduciary, you can’t just quit and walk away.

The Department of Labor cautions that “fiduciaries who no longer want to serve in that role cannot simply walk away from their responsibilities, even if the plan has other fiduciaries. They need to follow plan procedures and make sure that another fiduciary is carrying out the responsibilities left behind. It is critical that a plan has fiduciaries in place so that it can continue operations and participants have a way to interact with the plan.”

You’re expected to be an expert—or to hire help that is.

ERISA’s Prudent Man rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard. None other than the Department of Labor itself notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

As a plan fiduciary, it’s never too late to start doing the right things the right way. But doing the right things means understanding what is expected of you—and appreciating the implications.

—Nevin E. Adams, JD

For more information, see Fiduciary Fundamentals

http://www.dol.gov/elaws/ERISAFiduciary.htm

(1) With the enactment of the Pension Protection Act of 2006 (PPA), fiduciaries who automatically enroll participants in accordance with the provisions of the automatic enrollment safe harbor into a qualified default investment alternative (QDIA) get the protections of 404(c ) for those balances. However, the plan fiduciary remains responsible for the prudent selection and monitoring of the QDIA itself.

“Talent” Ed

As a kid, I remember sitting in church listening to a sermon about what I have since come to know as the “parable of the talents,” found in the book of Matthew in the New Testament.

Now, for those of you who slept through those sermons, the story(1) is about a man who is going out of town and gives three of his servants different amounts of money to hold for him while he is gone. The first is given five “talents”(2), and on his master’s return, he proudly gives him back the five he was left with—and another five! The second servant, who was left with two, returns those to the returning master—and two more besides. Both of these servants are commended and given more responsibility.

However, the third servant, who was only entrusted with one talent, tells his returning master that, knowing his master was the demanding type, he opted instead to bury his talent, so that he could return it safely—which he does. For his conservatism, this poor guy is called wicked and lazy, has the one talent taken from him and given to the guy who already has 10, and gets tossed out on the street.

Now, in church this was supposed to illustrate the importance of using the talents endowed on you by the Almighty to their fullest. Years later, I saw this as some kind of capitalist saga (Matthew was a tax collector, after all). But I remember wondering—even as a small boy—what would have happened if one of the two “good and faithful” servants had lost some of that money. Surely the poor guy who managed to give back everything with which he had been entrusted would have looked pretty good by comparison.

Another Look?

The ERISA Advisory Council recently heard testimony about (among other things) stable value and retirement security—and yes, stable value as a QDIA default option (see “Prudential Calls for Stable Value Funds as QDIAs”). Now, in view of what has transpired over the past several months, it’s hardly surprising that people might want to take another look at a less volatile investment. On the other hand, well before we slid into the current market slump, I spoke with, and heard from, many plan sponsors who “got” the logic behind the asset allocated solutions sanctioned by the Department of Labor as a QDIA option—but really weren’t comfortable putting “other people’s money” in an option that could fluctuate in value (see “IMHO: Other People’s Money”). In fact, way back in 2007, only about a third of respondents to a NewsDash poll (albeit an unscientific sampling) said that stable value shouldn’t be accorded QDIA status, while nearly half were in favor of that proposition (see “SURVEY SAYS: Should There be a Stable Value QDIA?”).

Of course, that perspective was pretty roundly criticized at the time by the “experts” in the field, frequently in the kind of condescending tones reserved for those who question the science behind global warming claims. Indeed, much like the parable’s servant who sought to safeguard, rather than put at risk, his master’s money, those who pressed for its inclusion, were taken to task for having the temerity to suggest staying with a default that had long been in place without incident.

But from the beginning, plan sponsors realized that there was a downside to diversified investment solutions: They could lose value. And, while stable value investments have their share of problems, they seem to have—in a way that not all target-date funds have—delivered what people expected.

The Issues

Don’t get me wrong—I “get” the issues with stable value; the concerns about transparency, illiquidity, fees, even insurer risk. These need to be addressed. I also appreciate that much of the current discomfiture with target-dates will dissipate with the next market upturn (other than the whole “misunderstanding about how much would be invested in equities when a participant hit retirement age” thing). And I do believe that, over the long haul, a diversified solution doubtless serves the average participant “better.”

I appreciate that fiduciaries are expected to make the “right” decisions, even when they aren’t the easy ones, and that participants defaulted into funds of whatever ilk are generally free to change that at their discretion. Moreover, I understand and appreciate the value and importance of a diversified portfolio—and acknowledge that, just because the DoL didn’t include stable value in its list of “core” QDIA vehicles, plan sponsors are in no way precluded from having it on their menu, or using it as a default fund (many have, and haven’t changed—and now, IMHO, probably won’t, QDIA status notwithstanding).

Still, when it comes to retirement planning, I think there is something to be said for getting what you expect—and getting back what you put aside.

—Nevin E. Adams, JD

1 Matthew 25:14-30 (King James Version)

2 A unit of value, though this is said to be the origins of the word “talent” as a reference to a gift or skill