Fiduciary 101 for Plan Committees

“We expect that sponsors know everything they need to know, when, in reality, they wear multiple hats, and fiduciary education is crucial,” says Jim Lyday, managing director of Pensionmark Nashville. Pensionmark runs training sessions for committees of its new clients, and “we spend a lot of time breaking information into small, bite-sized pieces of ongoing information. This education should be continual.”

Basic Concepts

When he oversees initial fiduciary training, Steven Kaczynski Jr. wants committee members to understand four fundamentals about being subject to the Employee Retirement Income Security Act’s fiduciary standards: 1)what it means to use discretion in making decisions, such as approving investment options, on behalf of the plan’s participants; 2) the importance of always acting with prudence and in the best interests of participants; 3) the need to have sound processes for fiduciary decisions; and 4) why “reasonableness” is so important in evaluating a plan’s fees.

“In explaining what decisions are fiduciary decisions, we also explain what decisions are not fiduciary decisions, because they are settlor decisions,” says Kaczynski, a senior financial adviser and managing director of fiduciary plan solutions at DBR & Co. in Pittsburgh. Settlor activities include many plan design decisions, for example.

Advisers also need to convey the seriousness of taking on fiduciary responsibilities but not scare people away, according to John Ludwig, a partner in and the founder of LHD Retirement, in Indianapolis. “We explain that if you are a fiduciary, you have risk, and that risk is if you don’t act in the best interests of the plan and its participants,” he says. “What we try to convey is that if you don’t do something appropriate, you subject your personal wealth to risk [via a negative lawsuit outcome]. Then we explain that there is fiduciary insurance for the committee itself, to cover that.”

It is very easy to convey the seriousness just by discussing the amount of retirement plan litigation that exists these days, Lyday says. To keep committee members from getting too worried, he reassures them that the risk of losing a participant lawsuit can be minimized. “I explain, ‘Here’s how you can sleep at night: I’ll walk you through the fiduciary processes that we follow to help you do all of this.’ It’s the unknown that’s scary to people. The known is not that scary, once you show them a pathway to solve for these issues.”

Fiduciary Specifics

Asked for the bottom-line message he wants committees to understand about investment selection and monitoring duties, Kaczynski says, more than anything, ERISA is a process-driven statute. “All of the legal cases are framed around that issue of process, and the processes need to focus [on] acting with prudence, in the best interests of participants,” he says.

Kaczynski also explains to committee members that a plan sponsor needs to either be an investment expert or hire an outside investment expert. If the committee hires an adviser as the investment expert, he tells committee members, that is a fiduciary act in itself. Among other things, members need to understand before hiring someone whether that adviser will act as a 3(21) fiduciary investment adviser, who makes specific investment recommendations that the committee then decides whether to implement, or as a 3(38) fiduciary investment manager, who makes and implements investment decisions.

Recordkeeper selection and monitoring also fall under fiduciary responsibilities. Lyday explains in training sessions that committee members should understand what their specific plan and its participants need, then hire a recordkeeper accordingly. “We see many plans that have a ‘plan in a box,’ which may not be what that participant group needs. Often, the committee just followed the advice of its [former] plan adviser, without understanding what the participant base actually needs.” For instance, a recordkeeper whose value is closely tied to its online participant tools may have less value to a base of employees who work in the field than to one mainly using computers.

During LHD Retirement’s training sessions, Ludwig says, his firm’s representatives discuss how, once a recordkeeper has been chosen, it is important to benchmark that provider’s fees and services on an ongoing basis. “We are looking at fees annually, and every three to four years we do broader benchmarking with [a request for proposals] to look at the services the plan and participants are getting for the fee,” Ludwig says. “The services that recordkeepers offer change over time, and so do the employers. You have to [consider] what services will drive efficiencies and increase overall satisfaction with the plan now.”

Ensuring the reasonableness of a plan’s investment and administrative fees also falls under fiduciary duties. It can be hard for committee members to grasp that ERISA does not require them to find the lowest fees, Ludwig says; rather, they need to look for the best value for that plan’s participant base for a reasonable fee. “That is the hardest part for committees to understand, because we’ve been on a 10-year run of ‘the lowest cost wins,’” he says. “What they have to do is look at what [recordkeeper] services are going to help those participants: In the end, the value of the services to their plan’s participants is more important than getting a fee that is 2 basis points lower than at another recordkeeper.”

“All of the legal cases are framed around that issue of process, and the processes need to be focused [on] acting with prudence, in the best interests of participants.”

Ongoing Training

Lyday and his team do not label it overtly as “fiduciary education,” but at every quarterly meeting, they give each committee a concise legislative and regulatory update. Pensionmark also has an extensive online learning system that provides more information on topics for plan sponsors, often in the form of a brief, usually five- to seven-minute, video and a longer article for those who want more in-depth details. “These sponsors are real people who are also participants in the plan, and they don’t all like to learn in the same way, just like participants in general,” he says.

At every committee meeting, DBR & Co. representatives typically brief the committee on one or two recent legislative, regulatory or legal developments that affect retirement plans. Additionally, some other topics DBR covers at the meetings, such as the annual review of a plan’s investment policy statement, offer a chance to revisit the highlights of how the statement connects to fiduciary duties. “When we do the IPS review, for example, it gives us the opportunity to remind the committee why we even have it,” he says. “We remind them that a plan is not required to have an investment policy statement, but if you have one, you’re required to follow it.”