Checking Your 401(k) Smoke Detectors

Daylight saving time doesn’t really live up to its name—but as you’re resetting clocks, anxiously awaiting the realignment of circadian rhythms and changing smoke detector batteries, it might be a good time to (re)consider the following.

Do you have fiduciary liability insurance?

I’m NOT talking about the Fidelity Bond required of every ERISA plan (this protects the plan and its participants from potential malfeasance on the part of those who handle plan assets. In fact, the plan is the named insured in the fidelity bond). I’m also NOT talking about the corporate governance policies that many organizations have in place for actions undertaken by organization officials. These may not cover you, and they very likely won’t cover actions taken as an ERISA plan fiduciary even if you are covered. 

What you need to check for is something called Fiduciary Liability Insurance. This policy typically protects the plan’s fiduciaries from claims of a breach of fiduciary responsibilities—an important protection since ERISA plan fiduciaries have personal liability, not only for their actions, but for the actions of their co-fiduciaries. Just remember; the cost of the insurance can be paid by the employer or by the plan fiduciary—but not from plan assets.   

Do you have an investment policy?

Note that I said investment POLICY, not an investment policy STATEMENT. While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement (IPS), the reality is that the law does not require one, and thus, many plan sponsors—sometimes at the direction of legal counsel—choose not to put one in place.

Of course, while the law does not, in fact, specifically require a written 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, plan sponsors (and the advisors they work with) will find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards—if those standards are already in writing, not crafted at a point in time when you are desperately trying to make sense of the markets.

Are your plan’s target-date funds (still) on target?

Flows to target-date funds (TDF) 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—with glidepaths that are not as dissimilar as their marketing materials might suggest.

A TDF 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). 

That said, TDFs are frequently, if not always, pitched (and likely bought) as a package. While each fund in the family is reviewed separately, and certainly should be, breaking up the set certainly carries with it a series of complicated consequences, not the least of which are participant communication issues and glide path compatibility. Not that those can’t be overcome—and not that those complications would be deemed sufficient to retain an inappropriate investment on the plan menu—but it doesn’t take much imagination to think about the heartburn that might cause.

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 actually 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. It’s worth checking out.

Is your plan committee capable?

Today the process of putting together an investment or plan committee runs the gamut—everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary.

There is, or should be, a legitimate, articulatable reason why each and every member of your plan/investment committee was selected. They, and every other member of the committee, should know that reason. If you can’t articulate that reason (or can’t with a straight face), they shouldn’t be on the committee—for their own sake, and the sake of every other committee member.

Note also that, over time, committees have a tendency to expand, sometimes based more on factors like internal organizational politics than on valuable perspectives or expertise. But human dynamics are such that the larger the group, the more diffused (and sometimes deferred) the decision-making. So, it’s worth revisiting that articulatable reason—and making sure it’s still valid—on at least an annual basis.

Do you need help?

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. 

That’s where qualified retirement plan advisors and/or experienced third-party administrators (TPAs) can make a big difference—both in making sure you have good policies and procedures in place—and that they are kept up to date! 

Think of it as a smoke detector for your retirement plan. It might not save you any daylight—then again…

- Nevin E. Adams, JD

Things to Ponder

In the course of my day, I talk to (and email with) people, read a lot, and every so often jot down a random thought or insight that gives me pause and makes me think. See what you think.

It’s not what you’re doing wrong; it’s what you’re not doing that’s wrong.

The best way to stay out of court is to avoid situations where participants lose money.

The key to successful retirement savings is not how you invest, but how much you save.

Does anybody still expect their taxes to be lower in retirement?

If you don’t know how much you’re paying, you can’t know if it’s reasonable.

Everybody wants a pension, but nobody seems to want an annuity.

Everybody’s “committed to the business”…until they aren’t.

Retirement income is a challenge to solve, not a product to build.

“Stay the course” is only good advice if you were on a good course to begin with.

Does anybody but lawyers actually read those legal “disclosures?” (that’s a rhetorical question.)

When selecting plan investments, keep in mind the 80-10-10 rule: 80% of participants are not investment savvy, 10% are, and the other 10% think they are. But aren’t.

There’s no such thing as a passive ESG fund.

“Don’t put all your eggs in one basket” applies to all life decisions.

What’s the “target date” for a “through” retirement date target fund?

92% of participants defaulted in at a 6% rate do nothing. 4% actually increase that deferral rate.

Plan sponsors may not be responsible for the outcomes of their retirement plan designs, but someone should be.

Sometimes just saying you’re thinking about doing an RFP can get results.

Hiring a co-fiduciary doesn’t make you an ex-fiduciary.

“Because it’s the one my recordkeeper offers” is not a good reason to select a target-date fund.

Given an opportunity to save via a workplace retirement plan, most people do. Without access to a workplace retirement plan, most people don’t.

Disclosure isn’t the same thing as clarity. Sometimes it’s the opposite.

Nobody knows how much “reasonable” is.

You want to have an investment policy in place before you need to have an investment policy in place.

The same provider can charge different fees to plans that aren’t all that different.

The biggest mistake a plan fiduciary can make is not seeking the help of experts.

Thanks to all who have inspired these—by thoughts, words and (mis)deeds—past, present and future.

- Nevin E. Adams, JD

5 Dangerous Fiduciary Assumptions

There’s an old saying that when you assume… well, here are some assumptions that can create real headaches for retirement plan fiduciaries.

Assuming that the worst-case deadline for depositing participant contributions IS the deadline for depositing participant contributions.

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. A delay in contribution deposits is also one of the most common signs 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.

Assuming that not being required to have an investment policy statement means you don’t need to have an investment policy.

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement (IPS), the reality is that the law does not require one, and thus, many plan sponsors—sometimes at the direction of legal counsel—choose not to put one in place.

Of course, while the law does not, in fact, specifically require a written 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, plan sponsors (and the advisors they work with) will find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards—if those standards are already in writing, 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.

Assuming that ERISA’s required fiduciary bond covers your liability as an ERISA plan fiduciary. 

These are two very different things with similar names. Suffice it to say that the Fidelity Bond required by ERISA protects the plan and its participants from potential malfeasance on the part of those who handle plan assets. The plan is the named insured in the fidelity bond. 

On the other hand, Fiduciary Liability Insurance typically protects the plan’s fiduciaries from claims of a breach of fiduciary responsibilities—an important protection since ERISA plan fiduciaries have personal liability, not only for their actions, but for the actions of their co-fiduciaries. The cost of the insurance can be paid by the employer or by the plan fiduciary—but not from plan assets.

Assuming that hiring a fiduciary keeps you from being a fiduciary.

ERISA has a couple of very specific exceptions through which you can limit—but not eliminate—fiduciary obligations. The first has to do with the specific decisions made by a qualified investment manager—and, even then, a plan sponsor/fiduciary remains 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 Section 404(c). Here also, even if the plan meets the 404(c) criteria (and it is by no means certain it will), the plan fiduciary remains responsible for the prudent selection and monitoring of the options on the investment menu (and, as the Tibble case reminds us, that obligation is ongoing).

Outside of these two exceptions, the plan sponsor/fiduciary is essentially responsible for the quality of the investments of the plan—including those that participants make. Oh, and hiring a 3(16) fiduciary? Still on the hook as a fiduciary for selecting that provider.

Assuming you have to figure it all out on your own.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law—and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic, “first, do no harm” stance are afforded no such discretion under ERISA’s strictures. That said, the Department of Labor has stated that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Simply stated, if you lack the skill, prudence and diligence of an expert in such matters, you are not only entitled to get help—you are expected to do so.

- Nevin E. Adams, JD

6 Dangerous Fiduciary Assumptions

There’s an old saying that when you assume… well, here are five assumptions that can create real headaches for retirement plan fiduciaries.

Assuming that not being required to have an investment policy statement means you don’t need to have an investment policy.

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement (IPS), the reality is that the law does not require one, and thus, many plan sponsors — sometimes at the direction of legal counsel — choose not to put one in place.

Of course, if the law does not specifically require a written 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, plan sponsors (and the advisors they work with) will 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 IPS, it is having an IPS — in writing — that is not being followed.

Assuming that all target-date funds are the same.

Just about every industry survey you pick up verifies that target-date funds, as well as their older counterparts, the lifecycle (risk-based) and balanced funds, have become fixtures on the defined contribution investment menu. For a large and growing number of individuals, these “all-in-one” target-date funds, monitored by plan fiduciaries and those that guide them, are destined to be an important aspect of building their retirement future.

There are obviously differences in fees, and that can be affected by how the funds themselves are structured, drawn from a series of proprietary offerings, or built out of a best-in-class structure of non-affiliated providers.

However, and while the bulk of TDF assets are still spread among a handful of providers, there are different views on what is an “appropriate” asset allocation at a particular point in time, discrete perspectives as to what asset classes belong in the mix, notions that individuals aren’t well-served by a mix that disregards individual risk tolerances, arguments over the definition of a TDF “glide path” as the investments automatically rebalance over time, and even disagreement as to whether the fund’s target-date is an end point or simply a milepost along the investment cycle. Oh, and a new generation of custom TDFs are now in the mix as well.

(See also, “Five Things the DOL Wants You to Know About TDFs.”)

Assuming that hiring a fiduciary keeps you from being a fiduciary.

ERISA has a couple of very specific exceptions through which you can limit — but not eliminate —fiduciary obligations. The first has to do with the specific decisions made by a qualified investment manager — and, even then, a plan sponsor/fiduciary remains 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 Section 404(c). Here also, even if the plan meets the 404(c) criteria (and it is by no means certain it will), the plan fiduciary remains responsible for the prudent selection and monitoring of the options on the investment menu (and, as the Tibble case reminds us, that obligation is ongoing).

Outside of these two exceptions, the plan sponsor/fiduciary is essentially responsible for the quality of the investments of the plan — including those that participants make. Oh, and hiring a 3(16) fiduciary? Still on the hook as a fiduciary for selecting that provider.

(See also, “7 Things an ERISA Fiduciary Should Know.”)

Assuming that all expenses associated with a plan can be charged to the plan.

Assuming that the plan allows it, the Department of Labor has divided plan expenses into two types: so-called “settlor expenses,” which must be borne by the employer; and administrative expenses, which — if they are reasonable — may (but aren’t required to) be paid from plan assets. In general, settlor expenses include the cost of any services provided to establish, terminate or design the plan. These are the types of services that generally are seen as benefiting the employer, rather than the plan beneficiaries.

Administrative expenses include fees and costs associated with things like amending the plan to keep it in compliance with tax laws, conducting nondiscrimination testing, performing participant recordkeeping services, and providing plan information to participants.

Assuming that the worst-case deadline for depositing participant contributions is the deadline.

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. A delay in contribution deposits is also one of the most common signs 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.

(See also, “5 Little Things That Can Become Big 401(k) Problems.”)

Assuming you have to figure it all out on your own.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law — and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic, “first, do no harm” stance are afforded no such discretion under ERISA’s strictures.

However, the Department of Labor has stated that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” Simply stated, if you lack the skill, prudence and diligence of an expert in such matters, you are not only entitled to get help — you are expected to do so.

- Nevin E. Adams, JD

‘Talking’ Points

In the course of my day, I talk to (and email with) people, read a lot, and every so often jot down a random thought or insight that gives me pause and makes me think. See what you think.

1. Disclosure isn’t the same thing as clarity. Sometimes it’s the opposite.
2. It’s not what you’re doing wrong; it’s what you’re not doing that’s wrong.
3. Sometimes just saying you’re thinking about doing an RFP can get results.
4. The best way to stay out of court is to avoid situations where participants lose money.
5. The key to successful retirement savings is not how you invest, but how much you save.
6. It’s the match, not the tax preferences, that drives plan participation.
7. Does anybody still expect taxes to be lower in retirement?
8. If you don’t know how much you’re paying, you can’t know if it’s reasonable.
9. You want your provider to be profitable, not go out of business.
10. Retirement income is a challenge to solve, not a product to build.
11. When selecting plan investments, keep in mind the 80-10-10 rule: 80% of participants are not investment savvy, 10% are, and the other 10% think they are. But aren’t.
12. Participants who are automatically enrolled are almost certainly even more inert than those who took the time to fill out an enrollment form.
13. 92% of participants defaulted in at a 6% deferral do nothing. 4% actually increase that deferral. rate.
14. Plan sponsors may not be responsible for the outcomes of their retirement plan designs, but someone should be.
15. Even if a plan has a plan adviser that is a fiduciary, the plan sponsor is still a fiduciary.
16. Most plans don’t comply with ERISA 404(c) – and never have. And, based on litigation trends, apparently don’t need to.
17. Hiring a co-fiduciary doesn’t make you an ex-fiduciary.
18. “Because it’s the one my recordkeeper offers” is not a good reason to select a target-date fund.
19. Given a chance to save via a workplace retirement plan, most people do. Without access to a workplace retirement plan, most people don’t.
20. Nobody knows how much “reasonable” is.
21. Innovative doesn’t mean nobody’s ever thought about it, or that nobody’s ever done it.
22. You want to have an investment policy in place before you need to have an investment policy in place.
23. The same provider can charge different fees to plans that aren’t all that different.
24. You can be in favor of fee disclosure and transparency and still think that legislation telling you how to do it is misguided.
25. The biggest mistake a plan fiduciary can make is not seeking the help of experts.

Thanks to all you “inspirations” out there – past, present and future.

- Nevin E. Adams, JD

5 Things Plan Sponsors Don’t (Always) Do — But Should

There is frequently a difference between doing all that the law requires of a plan sponsor and doing everything that could be done.

Here are five things that plan sponsors don’t always do — but should.

1. Have 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.

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. Keep 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 the 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.

3. Have 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 the 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, plan sponsors (and the advisors they work with) will 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.

4. Remove ‘Bad’ Funds from the Plan Menu.

Whether or not the plan has an official investment policy statement (IPS), plan sponsors are expected to conduct a review of the plan’s investment options as though they 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 the investment policy; will the plan sponsor/committee have the discipline to do the right thing and drop the fund(s), or will they 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 money in that fund. Maybe even a senior executive. Still, how can leaving an inappropriate fund on your menu — and allowing participants to invest in it — be a good thing?

5. Monitor Providers on a Regular Basis.

In some sense, we all “monitor” the performance of our plan provider all the time. Is the website 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 the foregoing 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). Plan sponsors have a very full-time job dealing with a myriad of things that are “broken” — why go looking for trouble?

At least once a year — no matter how well things are going — it’s worth determining 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 yes, even with a reliable provider, you may have to ask.

Beyond that, every three to five years (sooner if there are problems, of course), plan sponsors 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 undoubtedly has more experience with such things).

Two other things to keep in mind: First, 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 help.

Secondly, while fiduciaries are often reminded of the things they shouldn’t do, recent litigation trends suggest that they’re just as likely to get sued (if not more so) for failing to do something they should be.

- Nevin E. Adams, JD

"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