Part of Thornburg’s library of adviser
resources, the QDIA Blue Book is useful for plan advisers in supporting their
retirement plan clients as they assess a broad array of qualified default investment alternatives (QDIAs)—both off-the-shelf target-date funds (TDFs) and open-architecture custom solutions.
The growing volume of plan assets invested
in default investments, particularly target-date funds, has made selecting a QDIA one of the most important
responsibilities faced by plan fiduciaries, according to Rocco DiBruno,
managing director at Thornburg and director of the firm’s retirement group.
DiBruno says the guide’s range of
investment vehicles, including multi-manager custom solutions, distinguishes it
from other QDIA evaluation tools. The growing adoption of custom solutions and
the Department of Labor’s (DOL’s) directive to take custom solutions into
consideration made these critera a critical variable the firm’s selection
process, he said in a statement.
The QDIA Blue Book uses a patented
methodology that factors in a plan’s investment priorities and participant
demographics. Answers provided by plan fiduciaries to a simple maximum difference scaling (MaxDiff) questionnaire determine the relative importance of
13 criteria that are combined with demographic data to evaluate the suitability
of selected QDIA options.
The book helps retirement plan
advisers quantify performance, risk and organization criteria while identifying the
most suitable target-date or risk-based solution for each plan, based on the plan’s
priorities and participant demographics. It also helps plan sponsors manage fiduciary
responsibility in selecting and monitoring the plan’s QDIA.
“Plan fiduciaries look to their advisers
for leadership in presenting a methodology for evaluating QDIAs, and helping
them create reports and other documentation to demonstrate compliance with this
important fiduciary duty,” DiBruno said.
The Blue Book was developed by
Bdellium Inc., which provides retirement decision support tools that improve retirement
outcomes.
Thornburg Investment Management is
a privately owned global investment firm in Santa Fe, New Mexico.
The
basics of fiduciary duties—overwhelming to some plan sponsors—can be an
opportunity to provide critical education on fees and ERISA plan fundamentals.
The first step, says Jania
Stout, practice leader with Fiduciary Plan Advisors at HighTower, is to simplify
fiduciary responsibilities. Plan sponsors need to focus on four pillars under the
Employee Retirement Income Security Act (ERISA). “Those four components really encompass
everything plan sponsors should do,” she tells PLANADVISER.
Adhering to the terms of the plan
document is the first pillar, Stout says, followed by the duty to act as a
prudent expert or hire one, in order to do due diligence on investment choice
and fund monitoring. The third pillar, loyalty, is critical, she says. “Every
decision made around the plan, whether it’s choice of providers or plan or
investment options, has to be made for the sole focus of benefiting the plan’s
participants,” Stout says.
Some of plan sponsors’ difficulty
in understanding the scope of fiduciary duties comes from the complexity of
ERISA, believes James Holland, director of business development, MillenniuM
Investment and Retirement Advisors. “No one’s ever explained it to them,”
Holland tells PLANADVISER. “They have a hard time grasping what their role is,
in part because nearly every player—the recordkeeper, the plan provider, the
investment committee—defines it differently.”
But Holland cuts to the heart of
fiduciary responsibility. “There is only one,” he says. “To put the participant’s
interests first.”
The last pillar, diversification,
Stout says, is perhaps the easiest to comply with. Plan sponsors must give
participants the ability to diversify investments to grow their savings and
protect against large losses. In her 20 years of experience, she has seen very
few plans that did not have appropriate diversification capabilities that allow
people to move their money into different asset-allocation models in a timely
way.
Next:
How to start delivering a fiduciary education to plan sponsors.
ERISA Overview
Plan sponsor education is critical,
according to Holland, who emphasizes the plan sponsor’s need to understand all
the moving parts of a plan. He recommends bringing in a professional to teach
the plan sponsor or plan committees how all the roles work and their associated
fees. Important topics include the duties and fees of a recordkeeper, broker, third-party administrator
(TPA); and the fees in a particular mutual fund, separate account, or a
collective trust.
It is vital to choose an
independent expert, Holland stresses, not someone affiliated with a mutual fund
or with providing any plan services. “The plan sponsor needs an independent
assessment,” he cautions. Logical candidates are the plan’s consultant or
adviser.
Small plan sponsors with fewer than
50 participants and perhaps scant resources can start by reading, Stout
advises. Many publications exist to support plan sponsors, but smaller
companies with perhaps fewer than 50 participants and scant resources might
find they hit some roadblocks in understanding. “Some publications are very
complex,” she warns. Then it’s time for the retirement plan adviser experienced
in ERISA plans to step in. Advisers can be an invaluable resource for plan
sponsors; their qualifications and ability to communicate the ins and outs of
fiduciary responsibility are top selling points.
Stout suggests plan advisers offer
specific fiduciary training for their plan sponsor clients, such as a fiduciary
overview for the retirement plan committee or a best practices session for the
investment committee.
Fees are an excellent starting
point for plan sponsor education, Stout believes. The way fees work inside the
retirement plan is a difficult topic for many, she says, because fees are
complex to those who don’t live and breathe in this world. “Every fund family
is different and has different revenue-sharing agreements,” Stout says. Just
because a plan sponsor learns how one fund shares fees, that doesn’t mean they
can check the box on this topic. With every new provider or fund, the plan
sponsor needs to pull up the covers again to find out how the fees work.
Next:
Fee discussions must be ongoing at all committee meetings.Monitoring Fees
The duty to monitor fees means that
the discussion about fees is ongoing. “It needs to be part of
the discussion at every single committee meeting—the duty to monitor ties into
loyalty,” Stout says. The landscape shaded by Tibble
v. Edison underscores the importance of this fiduciary duty. “In the
past, committees talked about performance but very little about fees,” she
observes. “But the lawsuits are all about fees—not performance of the fund.”
Cost alone is not the issue,
according to Stout. The plan sponsor needs to scrutinize the fees to see who is
getting paid for which services from every investment in the plan and make sure
the fees are reasonable.
Judging the reasonableness of fees
is an area of constant concern for plan sponsors, says Shelby George, senior
vice president, adviser services for Manning & Napier, particularly when it
comes to the investment lineup. “Those fiduciaries that allow concerns over
future litigation to drive their primary decisions regarding investment options
may be ignoring a fundamental ERISA command to act solely in the interest of
participants,” she tells PLANADVISER.
Eliminating or choosing a
particular investment strategy solely to head off a lawsuit can fly in the face
of ERISA, George says. It is in fact putting personal or corporate interests
ahead of participants and beneficiaries, which ERISA discourages. “At a very
basic level, many plan sponsors, at times, miss some of the fundamental components
of procedural prudence.”
To assess the reasonableness of
fees, Stout recommends using benchmarking tools through a provider or through a
third party, such as BrightScope or Fiduciary Benchmarks.
When it comes to fiduciary duties
for plan sponsors, Holland believes it is impossible to underestimate the
importance of learning about fees. “A 9-0 Supreme Court ruling [in Tibble]?
When’s the last time you saw a unanimous decision?” he says. The issue goes
beyond political party affiliation. “The plan sponsor has to understand who’s
touching the plan. You’re responsible. If the Tibble decision is not the
wakeup call, I don’t know what will be.”
Contrary to what providers may think, Holland
says, there is only one boss in a retirement plan: the participant. “We all
answer to the participant,” he says.