PSNC 2014: Your Fiduciary Checklist

These points were discussed with Josh Itzoe, partner and managing director, Institutional Client Group, at Greenspring Wealth Management; Jeb Graham, retirement plan consultant and partner at CapTrust Advisors LLC; and R.Charles “Chuck” Tschampion, director, Special Projects, at the CFA Institute.

Properly structure and equip your committee.

“To begin with create a committee charter. Go through a formal process determining the criteria for who should be on the committee,” Graham said.  Itzoe added, “Great plans come from great committees. It’s important to pick the right folks. The best committees have somewhere around three to seven people. With more than seven committee members, nothing will get done. Make sure the people chosen are committed. Have them acknowledge what being a committee member entails. Then pick a meeting schedule and put it on the calendar otherwise the meeting will get pushed. After the right team is selected, educate them about their fiduciary responsibilities.” 

“Fiduciary prudence is a process,” Tschampion said. He noted the CFA Institute has produced a primer on the Pension and Trustee Code which includes principals such as putting the participant first. It’s available on their web site and written from the stand point of a new trustee and what it is they have to confront. It can also help create the committee charter. In addition, according to Tschampion, the institute has a monograph primer from the standpoint of a new trustee and various things they will confront and what they should ask. “It’s more important to know what you have to ask and think about rather than think you have all the knowledge.” 

Ensure the plan is operated in accordance with plan documents and all applicable legal/regulatory requirements.

“While the risk of litigation is very low, there is a lot of fear mongering about fiduciary liability. If you have processes and you follow those processes you are going to fulfill your duties. We feel the bigger problem for plan sponsors are operational failures and we also feel that the sign of a healthy plan is to have a process in place to find operational failures and to fix them and avoid them in the future. Make sure you read your plan documents and your summary plan description and that they align.  Not understanding eligibility or if deferral amounts are too high or too low, are examples of things that can go wrong. You have to step back and understand the operational processes,” Itzoe said.

Graham concurred and added, “Most committees are well intentioned but all of a sudden they may realize it’s been years since they’ve amended their documents. I see this all the time with new clients.  We come in and create calendars with all necessary tasks scheduled out, plus we take on responsibility for keeping clients apprised of changes in regulations, for instance the Windsor change. Investment policy may be visited in the first quarter, and plan design in the second quarters and so on. It forces you to assess all areas. You have to have a process and a methodology to look at everything on a consistent basis.”

Review and benchmark retirement plan investments and fees.

“As a fiduciary you are responsible to make sure that by a standard of prudence all the investments are good ones are good for the participants and beneficiaries. Not many people have the expertise to be able to look at investments and judge them so ERISA and other fiduciary standards say if you don’t have the expertise that you need, find someone that does. It’s important to have someone compare potential investment using an RFP (see “PSNC 2014: The RFP from Start to Finish”) to make sure that the managers are competent and that the fees are reasonable,” Tchampion said. Cooke Mintzer added, “Deciding if plan fees are reasonable or not is very subjective.”

According to Itzoe, it’s transparency that builds trust. “When benchmarking, be careful to separate the fees for advisers, recordkeepers, etc. Go to your recordkeeper every two years and ask what their required revenue is. Go to blind bids—that will help you assess. They usually come in very close. Benchmark your advisers. One size fits all is not the way to go. Get market data in real dollars and percentages. Break down the components. Communicate back to participants simply and with transparency. Help participants understand the fees,” he said.

Prudently select, appoint, and monitor plan service providers.

According to Graham, “You can have an adviser measure a recordkeeper and a recordkeeper measure an adviser.  You need to work with someone who only does what you need. You want a specialist. What types of credentials do they have? Get their references. How do you evaluate this person? Use benchmarking tools to see if fees are reasonable.” Itzoe added, “Sometimes you have committee members that have had a very long tenure and they may be stuck in the status quo.  In cases such as this, it’s particularly good to send out an RFP. Plan sponsors have to increase the accountability of providers. Some advisers have fixed fees. If an adviser is paid based on assets, you need to check them more often. After all, you have the responsibility to give the boot to providers who are not doing a good job. Send out an RFI every few years—even if you aren’t looking for a change.”

Tchampion advised attendees to sit down with all of their providers every year. “It’s in part to evaluate them, and there may also be things in the agreement that are no longer necessary or a service that needs to be emphasized. How well is the service provider doing the things you hired them to do? For a recordkeeper, what is the response on the call center for participants? How well does web site work? For investment managers, are they sticking to the plan sponsors investment policy.” He added, “The SEC says when you look at fees, you need to look at all other charges. Look at absolute levels of fees and look at whether you are getting economy of scale with growth. Are you getting what you pay for? Are you being charged for things you don’t need? This exercise may bring costs down.”

Measure and benchmark plan participants’ investment allocation and outcomes.                

“The biggest part of the problem is to try to raise the financial awareness and education of the participant. Get them in, have them defer as much as possible, invest it wisely and it will lead to a secure retirement,” Tchampions said. Graham said within the financial calendar tool CapTrust uses, it determines a success menu. “How does the plan sponsor measure participant success? We can do a lot but in the end creating good outcomes for participants is our goal. You throw a stake in the ground and make sure you are getting better. Identify how you measure success and what steps are needed,” he said. Itzoe added, “Begin with the end in mind. Take best practices and implement them. Make it actionable.”