The policy that Evans refers to is a written document that helps to assure that investments are made in a rational manner — it is also indispensable in monitoring plan activities, not to mention that it’s a key document requested by the Department of Labor (DoL) during plan audits.
Fred Reish, an ERISA (Employee Retirement Income Security Act) attorney and partner at the Los Angeles law firm Reish Luftman McDaniel & Reicher, says that while annual reviews are good, quarterly reviews are better, and that they should focus on three distinct aspects of the plan. First, plan sponsors should look at each of the plan funds to make sure they are still “superior-performing, reasonably priced funds,” he says. Then, plan sponsors need to make sure the investment options cover a broad range, so employees of any age or risk tolerance can build a retirement portfolio that meets their needs. Finally, at the big-picture level, plan sponsors should ask themselves whether the investment options in the plan are the kind that plan participants can prudently and intelligently use to build their retirement benefits. “If you have a whole bunch of aggressive funds and an unsophisticated workforce, this is clearly wrong,” says Reish.
If plan sponsors comply with ERISA’s 404(c) regulations, they do get some relief from responsibility for investment decisions made by the individual participants. But they still retain responsibility for ensuring that the participants have appropriate asset classes in which to invest, selecting competent investment managers for the various investment options, routinely monitoring and evaluating investment performance, and controlling costs, which are typically borne by the plan participants.
Plan sponsors have a fiduciary responsibility under the guidelines of ERISA to make sure that the plans are managed in a cost-efficient manner, without detriment to the participants. Several years ago, the DoL embarked on an initiative to stress to plan sponsors the importance of ensuring that the vendor fees paid by 401(k) plan participants are reasonable. “The DoL is continuing to fire up the stove in terms of looking at fees and making sure they are competitive,” says Dan Esch, managing director at Minneapolis-based Defined Contribution Advisors. “Since it’s the plan participants in the defined contribution plans who end up paying the vast majority of fees, the DoL has a keen interest in understanding what level of fees participants may be paying from one vendor to the next.” The DoL, in conjunction with a number of trade organizations, issued a model 401(k) fee-disclosure form designed to help plan sponsors understand investment fees and expenses and to facilitate comparison of competing providers’ plan services.
Do the Due
Many 401(k) consultants offer similar forms. David Wray, president of the Profit Sharing/401(k) Council of America, a Chicago-based trade association of plan sponsors, says his firm encourages everyone in the RFP (request for proposal) process to use its worksheet to compare apples to apples. “If there is ever a question of why you chose a particular vendor, you can say you performed the due diligence on fee disclosures,” he says. “It’s important because every plan has its quirks, and companies have to ensure that a vendor can accommodate any unique plan-design features.”