Plan Governance

Why do plan sponsors hire retirement plan advisers? Is it to help them improve their plan? To strengthen plan governance? To bring expertise the plan sponsor lacks? The reasons—there are probably more than one—vary from sponsor to sponsor.

In any event, it is likely that a plan sponsor hiring an adviser anticipates measurable outcomes that that professional will provide—a return on investment (ROI) of sorts. To improve the plan, it could be demonstrably better metrics showing increased participation and deferral rates—these could be high on sponsors’ wish list when interviewing candidates. Just as important, and maybe less obvious, is the ROI advisers bring to plan governance—maybe the introduction of an investment policy statement (IPS) or a regular meeting schedule for the plan committee to adopt.

According to the Department of Labor (DOL) publication “Meeting Your Fiduciary Responsibilities,” under the Employee Retirement Income Security Act (ERISA) fiduciaries have specific requirements. These include to maintain reasonable plan fees, follow the terms of the plan, select diversified investment options and, perhaps most important, manage the plan with participants’ best interests in mind.

For sponsors less aware of their plan governance needs—e.g., not understanding specific terms of the retirement plan, such as those relating to fees—here is a particular place where advisers can help, sources say: in establishing, and ensuring the plan follows, best practices in plan governance.

An analysis of responses to our 2020 PLANSPONSOR Defined Contribution (DC) Survey—provided by nearly 3,000 plan sponsors representing a broad range of U.S. industries—bears out this need, showing insufficient best practices in plan governance. Advisers may have more work to do with their current clients, but they also may find many potential clients that could use the help of a good adviser or advisory firm.

Clearly, many plan sponsors desire help: 72% outsource some fiduciary responsibilities. A little more than one in five respondents—22%—have hired a 3(16) adviser with a broad administrative scope while 33% have hired one with limited scope; 10% did not know if they use a 3(16) adviser.

As it relates to investment advice, 38% of respondents use a 3(21) adviser, 23% use a 3(38), and 29% did not know if their adviser was either.

Joshua Ulmer, senior institutional consultant at Morgan Stanley in Portland, Oregon, says outsourcing can be attractive not just to plan committees that feel like they are stretched too thin. He says an ideal candidate for 3(38) engagement, for instance, is a plan committee that is dedicated but wants to focus on other things beyond investments, such as financial wellness.

ERISA demands, among many other things, that fiduciary retirement sponsors carefully evaluate and monitor the reasonableness of the fees their participants pay. The law does not stipulate that one type of fee structure is superior in itself, nor does it suggest that all prudent plan fiduciaries must run their plan the same way, experts note. According to the survey, 43% of sponsors calculated all fees paid in the past year to their DC plan provider/recordkeeper and externally benchmarked those fees; 7% calculated the fees and plan to benchmark them; 17% calculated fees but did not externally benchmark them; 4% did not calculate fees but plan to in the next six months; and 29% may calculate fees.

Another best practice is to regularly review investment options. Many retirement plan advisers and ERISA counsel recommend that sponsors review investments at least quarterly. According to responses, only 43% of plan sponsors formally review investments quarterly; 13% do so semi-annually, and 31% annually. If there is a problem with an investment, it might go unnoticed if the committee performs only annual reviews.

Jim Scheinberg, managing partner, founder and chief investment officer (CIO) at North Pier Search Consulting in Marina del Rey, California, says many of the new terms and plan features from the Coronavirus Aid, Relief and Economic Security (CARES) Act had a big effect on employers and their participants. “Some employers may contemplate repricing exercises or evaluate whether the plan is priced appropriately, and some advisers may even initiate a cost analysis for clients concerned about opaque investments,” he says. “A change in demographics may be meaningful for plan sponsors with asset-based pricing; any changes in plan assets could have a meaningful impact if the market were to head down again, especially if they’re mispriced.”

Another key best practice that advisers generally bring to retirement plans is the use of a written investment policy statement. Thom Shumosic, owner of MidAtlantic Retirement Planning Specialists in Wilmington, Delaware, says the IPS is a good way for advisers to “keep score” on the retirement plans they serve and likens it to a report card.

A properly written IPS outlines the client’s actual investment monitoring process and, if followed, is vitally important to demonstrate that plan fiduciaries have, and follow, an established strategy for evaluating the plan investments’ value. Sixty-nine percent of respondents have an IPS while 13% do not and 17% are unsure. Sponsors that have an IPS should ensure they are in compliance by frequently evaluating the document and keeping it up to date with regulatory and legislative changes.

While there is no fiduciary training requirement under ERISA, during its investigations the DOL has begun asking whether and when plan committee members received training. If they did not, there is no penalty or violation. However, says Summer Conley, a partner in Faegre Drinker Biddle & Reath LLP, in Los Angeles, “We expect that the DOL may look closer at how the committee operates in order to determine whether a fiduciary breach has occurred. Further, plan fiduciaries are often required to receive fiduciary training pursuant to litigation settlements and DOL enforcement actions.” Survey data indicate that just 44% of sponsors recently received fiduciary training.

Art by Valeria Petrone