Prudent Man with a Plan

Most 401(k) reforms before Congress don't address a critical source of risk: fiduciary duty.

Unfortunately, many companies operate under the misconception that by outsourcing plan administration to third-party vendors and a plan trustee, they have off-loaded fiduciary responsibility. Others think that by giving employees a slate of investment options, and letting employees self-direct those investments, they are also off the hook. “Most companies think, ‘We’ve given them these choices, that’s all we have to worry about.’ That also shows a lack of prudence,” says Steinhour.

In fact, ERISA mandates that when no plan administrator is designated in a plan document, the plan sponsor is the plan administrator. In this case, the sponsor cannot insulate itself from ongoing responsibility to another party, such as a third-party administrator, Also, where the sponsor or a committee of plan-sponsor employees appoints the plan trustee or investment manager, responsibility for monitoring the performance of the trustee or investment manager ultimately rests with the sponsor or committee making the appointment, says Turk-Meena.

What’s more, plan sponsors often are involved in selecting the funds in which employees may invest. With these selections comes a twofold fiduciary responsibility. First, the individual or group must act according to the “prudent man” standard, defined by ERISA roughly as the actions a prudent man in a similar capacity would take in similar circumstances. Execution of fiduciary duty in this instance is not just a matter of picking good investment options or a worthy manager (although the chances of anyone raising fiduciary issues are slim if investments are doing well). The law requires that fiduciaries have a sound process in place to make the decisions.

“Fiduciary responsibility is assessed based on process,” says Turk-Meena. To meet the prudent-man standard, fiduciaries must make themselves reasonably knowledgeable about the options available, investigate a variety of options and compare choices with competing offerings, and keep detailed records showing how the final decision was made.

The Monitoring Requirement

The duties don’t end there. Fiduciaries are also responsible for monitoring the performance of the trustee, investment managers, or investments they have chosen to ensure that they meet certain performance thresholds or match the investment policies outlined in plan documents. It’s the failure to execute on this requirement that causes problems for many companies. “A lot of companies say, ‘If there’s a problem, we deal with it,’” says Turk-Meena. “That’s a blatant ignoring of fiduciary duty. There is a monitoring requirement as well.”

At International Paper Co., fiduciaries closely monitor the performance of the team of investment managers the paper and forest-products company uses to manage the customized investments it provides for its employees through its 401(k) plan. Robert Hunkeler, the company’s vice president of investments, receives monthly performance reports from plan custodian State Street Bank, and a quarterly detailed analysis from IP’s investment consultant. He reports to the fiduciary review committee twice a year and meets with his investment managers at least once a year. “Our goal is to ensure that our investment managers are meeting targets,” says Hunkeler. “That’s our first line of defense to protect plan assets.”

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