Find your plan document(s) – and read them.
One of the key guiding principles for plan fiduciaries is something called the plan document rule, which says the fiduciary must follow the plan unless the terms of the plan contradict the rules of ERISA. So, first and foremost, I’m not sure how you follow the terms of the plan document if you haven’t read the plan document.
It’s incredibly easy in this hectic day and age for certain practices to take root and become part of “the way we’ve always done” things, and yet be at odds with the actual plan language.
Indeed, while a plan document isa legal document, and often uses language that seems designed to undermine a clear and practical application of its terms, I’m always amazed in my random queries to plan sponsors how many haven’t read it – or haven’t read it recently, though they nearly always have some idea as to where it has been stored for safekeeping.
Oh – and while you’ve got the document in hand, make sure that it’s been kept up to date. The laws do change, and – particularly if you’re relying on an individually designed plan – it’s easy to overlook the need to make changes to the legal document that governs your plan.
Make sure your target-date funds are (still) on target.
Still another guiding fiduciary principle is the diversification rule. This says that a fiduciary must ensure that the plan offers a wide range of investment options to help participants meet their investment needs and diversify their investments accordingly. And when it comes to such things, it’s hard to imagine a more apt focus than the default investment choice of the past decade – the target-date fund (TDF).
Sure enough, flows to target-date funds have continued to be strong – and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms, though as recently as 2016, 3 of the 10 largest target-date managers experienced outflows for the year. According to Morningstar’s “2018 Target-Date Fund Landscape,” nearly 95% of the $70 billion estimated net flows to TDFs in 2017 went to target-date series that invest predominantly – i.e., at least 80% of assets – in index funds.
That said, the average target-date fund lost 4% last year through
Dec. 10, according to Barron’s (citing Morningstar), while the S&P
500 is up just under 1%. In fact, not one of 664 target-date funds on
the market, which together hold more than $1.1 trillion in assets, has
had a positive return, according to Morningstar – though it’s the first
time in a decade that target-date funds have posted widespread losses.A target-date fund is, of course, a plan investment, and like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary (don’t take my word for it – that’s coming straight from the Labor Department).
The reasons cited behind TDF selection run a predictable gamut; price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers, or compatible with their program) – and doubtless some are doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics. Whatever your rationale, it’s likely that things have changed – with the TDF’s designs, the markets, your plan, your workforce, or all of the above.
Regardless, it’s probably time you took a fresh look.
Figure out what your plan costs.
Another of the key principles is the exclusive benefit rule, under which a fiduciary must operate the plan in a way that solely benefits participants and beneficiaries, and these days a key element of that has been paying only reasonable expenses for services rendered.
And while it’s perhaps not that unusual for plan fiduciaries to do an analysis at the plan level, this time it might be worth also picking a couple of representative individual accounts, and coming up with a dollar figure (rather than a basis point rendition) for what they are paying each year. Including your own.
Now, in order to do so, at an individual or plan level, you must of course know the services rendered, by whom and how they are rendered, and what fee(s) are paid for them. And then you have to decide if it’s reasonable (and while it’s often glossed over, not just the fees but the services).
But if you don’t know the first part, you can’t determine the last. And if you can’t do that, you aren’t fulfilling your duties as a plan fiduciary.
And that could be trouble. For the participants, for the plan – and, ultimately, for you.
Assess your expert-ise.
A final ERISA fiduciary principle is something generally referred to as the “prudent expert” rule, often labeled the highest duty known to law. It requires that a fiduciary perform its duties “with the care, skill, prudence and diligence under the circumstances then prevailing, that a prudent man acting in like capacity and familiar with such matters would use.” That rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must do so at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard.
The Department of Labor 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.”
In fact, you might want to start here. It could make fulfilling those other New Year’s Resolutions all the easier…
- Nevin E. Adams, JD
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