Basic Training
How to help educate plan committee members
Reported by Judy Ward
“There is nothing in ERISA [Employee Retirement Income Security Act] that requires fiduciary training of any kind, and there has been no formal guidance from the DOL indicating that training is required,” says Julie Stapel, a partner in the Chicago office of law firm Morgan, Lewis & Bockius LLP. But, in recent examinations, the DOL has been asking sponsors when their plan committee members last received fiduciary training, she says.
Training has also come up in 401(k) lawsuits lately, she says. “In those cases, the fact that a committee has received fiduciary training has been viewed as favorable.”
ERISA and Governance Basics
First, committee members need to understand how they must comply with ERISA’s fiduciary definition. “When someone is exercising discretionary control over the assets of the plan, he is a fiduciary,” Stapel says. “If you are on a committee and the committee has not explicitly delegated a fiduciary duty to another party, you can assume the fiduciary responsibility is [all] yours. We often see that, if a plan has an investment manager or consultant involved, committee members may think they are no longer fiduciaries. In fact, they are.”
The committee members also need to realize that ERISA does impose personal liability on plan fiduciaries—including them—Stapel says. And, while a plan fiduciary could conceivably lose his personal assets as part of a judgment against a plan, she cautions against stressing this. “I prefer not to lead with that, because then people will get unduly scared,” she says. In reality, most plans have fiduciary-liability insurance, and many employers indemnify committee members in case of potential legal actions, she notes.
ERISA can also specifically guide committee members regarding how to handle fiduciary duties. “ERISA is, first and foremost, an anti-conflict-of-interest statute,” Stapel says. “As a committee member, you have to make sure that, when you make a decision, you’re making that decision solely in the best interests of participants and their beneficiaries. The interests you have in your corporate role do not come into play.”“For many folks on committees, it’s hard to take off their corporate CFO [chief financial officer] or HR [human resources] director hat and put on their fiduciary hat,” says Ken Parkinson, vice president of retirement plan services at Hardy Reed LLC, a fiduciary consulting firm in Oxford, Mississippi. “But, on the committee, their allegiance has to go from the corporation to the participants and their beneficiaries.”
Advisers also should explain to committee members that ERISA emphasizes fiduciaries following sound processes consistently. “Process is paramount,” Stapel says. “As a fiduciary, you have the duty to be prudent, and what that really means is you have the duty to have prudent processes. Fortunately, ERISA does not require that you have good outcomes for every decision you make. But it does require you to go through a prudent process for the fiduciary decisions you make.”
To follow sensible processes consistently, committee members also need to become familiar with the basics of plan governance. “Some committee members may not have any day-to-day contact with the plan, so we explain to them, ‘Here is what you need to be doing to make sure the plan is operated in a compliant way,’” says Sean Deviney, retirement plan specialist and financial adviser at Provenance Wealth Advisors in Fort Lauderdale, Florida.
“The key governance things they need to understand are, first, the underlying plan documents: What do these allow them to do, and what do they not allow them to do?” says Robert Projansky, a New York City-based partner at law firm Proskauer Rose LLP. “And, second, what are the roles and responsibilities of each party? Are the right parties doing the right things and in accordance with the plan documents?”
Real-World Decisions
Effective fiduciary training of committee members includes not only giving an overview of fiduciary rules and governance roles and processes but also their practical application, Projansky says. “In the real world, how are these rules and processes applied? What are real-world examples and best practices as to how decisions should get made?” he says.
New committee members without investment expertise likely cannot devote the time to becoming in-depth investment experts, says Emmett Dupas III, a wealth management adviser who works with retirement plans at Northwestern Mutual Wealth Management Co. in Metairie, Louisiana. “We believe the process—a process that is understood and repetitive—is the most important thing,” he says. “As advisers, we’re responsible to go through with them what is most important,” he says. These fiduciaries need to learn the committee’s process for monitoring funds and the investment policy statement (IPS)’s criteria for replacing them, as well as why the investments on the menu were chosen and make sense for their plan, he says.“We are helping them understand: What is a prudent process for evaluating these investments?” Deviney says. “They need to understand, how we make sure we offer best-in-class investments in asset classes that are suitable for our participants.”
As Parkinson says, “Just trying to chase the ‘hot’ fund is oftentimes the worst thing they can do.”
Understanding investment-related processes is critical, but committee members also need to learn about the plan’s investments, Projansky points outs. “There’s the legal saying: ‘A pure heart and an empty head are not good enough’ to defend against a fiduciary breach.
“I sometimes say to clients, ‘You should ask yourself: “If, three years from now, I am on the witness stand, can I explain the basis for the decision I made, including both the risks and advantages of that decision?”’” he says.
Committee members also need training on how to evaluate fees for plan investments and services. “The fiduciary responsibility is to make sure that the fees are ‘reasonable’—which, of course, is the least helpful thing you can tell a new committee member,” Stapel says. “But, for monitoring investments, it’s kind of the same thing as monitoring service providers: ‘What is our process?’”
Fiduciaries should have a feel for the plan’s fee-related options, such as the possibility of moving to a lower-fee share class, Parkinson says. “When you select and monitor investments, you want to have an idea of how the fee compares with those of the peer group,” he observes. Likewise, the committee needs some grasp of how the recordkeeper’s fees compare with the norm for similar plans. Benchmarks can be useful in this area.
Projansky recommends explaining to the committee what it should do with fee disclosures. “It’s almost tempting for them to just ‘check the box’ and say, ‘I received the fee disclosure, so I will not get in trouble,’ and then put the documents in a file,” he notes. “But the DOL has said, ‘We think fiduciaries have the obligation to review this information on a periodic basis.’ So, take the disclosures, and benchmark the information.”
But fees are just one consideration in committees’ decisionmaking about investments and providers, Projansky says. “Fees should be looked at critically, but the fee analysis is really no different, in many ways, from analyzing other aspects of the investment or service. It’s one element that gets treated differently, because it has gotten much more attention, of late.”
After an adviser helps train committee members initially, he needs to give them ongoing updates to keep their knowledge current. “We have a regular legislative and regulatory update in our committee-meeting materials, and we also summarize it in committee meetings,” Deviney says. “An update is done when there is something that has ‘meat’ to it, something that actually could have a material impact on the plan or the operations of the committee.”
Lately, Deviney has spoken often with committees about the
Labor Department’s proposed fiduciary changes. He also has updated them about
matters such as President Obama’s proposed budget, including how it could
affect retirement plans; new Form 5500 requirements; an Internal Revenue
Service (IRS) announcement about its determination-letter process; and the
industry trend toward plan sponsors removing revenue sharing and implementing a
per-participant administrative fee instead.
Dupas also stresses the importance of advisers viewing
fiduciary training as more than a one-time thing. “Trying to educate
fiduciaries, in our eyes, has got to be an ongoing process,” he says. “We work
in a dynamic industry, so changes come up constantly.” —Judy Ward
KEY TAKEAWAYS
- ERISA provides a good road map for what committee members need to know;
- Committee members need help to be able to evaluate investments and fees; and
- They also need processes for evaluating plan providers.
Training Topics
- ERISA’s fiduciary definition
- Personal fiduciary liability, and insurance and indemnification protection
- Avoiding conflicts of interest when making decisions
- The importance of prudent processes
- Key plan documents’ stipulations on plan governance
- Roles and responsibilities of committee members
- Processes for selecting and monitoring investments
- Processes for selecting and monitoring providers
- Fee benchmarking, and fees as a decision criterion
- Ongoing regulatory, legislative and legal developments, as well as industry trends