Plan sponsors and trustees always ask “Am I paying too much for my plan?” “Are my funds outperforming the markets?” “Do you give advice to my participants?” These are great questions, but first they need to ask: “Do I know what my duties are as a retirement plan fiduciary?”
Few business owners, managers or executives appreciate the most important part of running a retirement plan. As a plan sponsor, or steward, you have a legal duty to act in the best interest of the person and organization that has entrusted you with the management and control of their retirement assets. This includes investment choices, fees, provider choices, participant education, risks, conflicts of interest and more.
“Not enough plan sponsors take this seriously, let alone understand the scope of their duties and responsibilities,” says Robert Yelenovsky, vice president and manager of Retirement Plan Advisors at Fragasso Financial Advisors. “Although these duties can be shared, they can never be abdicated. Ignorance or being too busy is not a viable defense.”
Smart Business spoke with Yelenovsky about your fiduciary duties.
What do fiduciaries need to be doing?
First, accept your legal responsibility for overseeing someone else’s retirement plan assets. Whether you’re the owner, trustee, plan sponsor, board member or investment committee member, you are a fiduciary.
Then, take time to understand your duties and responsibilities. You’re expected to provide services according to five principles:
- Prudence, focuses on the process for making fiduciary decisions.
- Loyalty to those you are entrusted to represent.
- Exclusive purpose. This is ignored the most. Fiduciaries are expected to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. You might be comfortable with your former fraternity brother being paid from the plan assets, but is he really the best person for the job?
- Diversification of plan assets with reasonable plan expenses.
- Adherence, where fiduciaries understand and follow the plan documents. It’s wise to document decisions and the basis for those decisions.
How can fiduciaries find where they are not fulfilling their duties?
Start with a self-assessment and gap analysis. What should our organization be doing? What is it not doing? What gaps carry the most consequence, risk or liability? Make a plan. Take action. Typically the highest risks have to do with the provider, fund choices and what those selections cost, as these generate the most lawsuits. Next is the lack of participant education and advice.
Use fiduciary audit checklists to help in this gap analysis. A checklist might have 30 items, so it can be overwhelming. Your financial adviser can help you prioritize and create a calendar to get you back on track.
These exercises take time and energy, but ignore or put them off at your peril. Not only do you expose yourself to lawsuits or Department of Labor penalties, you may cost plan assets from the very employees who help build and maintain your business. This happens through misunderstanding fees and who gets paid from them, reluctance to switch providers or adviser, or disinterest in employee education because it takes time or you think no one is interested.
Where does a co-fiduciary come in?
You can hire an experienced prudent professional who has a legal share in the outcome. The trustee or plan sponsor ultimately makes the decisions but the co-fiduciary is paid to provide the advice.
The most common, the paid 3(21) fiduciary investment adviser, provides investment selection and monitoring, provider analysis and selection, uncovers fees and benchmarking to help determine whether they’re reasonable, establishes and delivers a participant education program, and provides guidance for starting and maintaining a qualified retirement plan.
It’s a good idea to find a financial adviser who helps owners, directors, trustees and committee members understand their role as a fiduciary. Does your adviser take on this role and level of responsibility or do they outsource it? If they say they do, is it in writing? Take the time to get this right. You are trusted to do so.
Insights Wealth Management is brought to you by Fragasso Financial Advisors