A Plan Sponsor Philosophy Can Help With Plan Decisions

A philosophy can help plan fiduciaries focus on the “why” when making retirement plan decisions and not just the “how,” enhancing their fiduciary process.

By Rebecca Moore | October 07, 2016
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Many companies have mission statements or philosophies that drive business decisions, products and services they offer and how customers are treated.

David Hudak, senior consultant at Portfolio Evaluations, Inc. in Warren, New Jersey, says a company’s retirement plan is just another piece of that overall mission. In an article he wrote with Attila Toth, partner at Portfolio Evaluations, they stress the need for having a plan sponsor philosophy.

In the article, Toth and Hudak say a well-defined mission or philosophy can help plan fiduciaries think about the “why” when making decisions and not just the “how.” As an example of “why” versus “how” thinking, the article considers the way an investment committee seeking an Employee Retirement Income Security Act (ERISA)-approved qualified default investment alternative (QDIA) may select a target-date fund (TDF) series. The simple choice to go with a TDF is “how” they meet their QDIA requirements. But those plan sponsors with a well-thought-out philosophy will also elect to assess the glide paths of a group of diverse TDFs, to ensure the final selection aligns with their plan’s goal. This is “why” one TDF series is selected over another.

“In some cases plan sponsors have gotten away from the ‘why’ for making decisions,” Hudak tells PLANSPONSOR. “Conversations with clients revealed they felt brow-beaten by regulations and litigation, and felt they have gotten out of touch with why they have the plan in the first place. They felt they were losing focus.” This led to the idea of establishing a plan sponsor philosophy.

Portfolio Evaluations has helped clients develop plan sponsor philosophies; it starts with the retirement plan committee asking some open-ended questions. For example, What is the purpose of the plan, does it align with the organizational mission, and does it fit with other benefits? Hudak warns that there will not necessarily be consensus among committee members in the beginning, but as they have the dialogue, they usually are able to come to a group consensus.

NEXT: Considerations for developing a plan sponsor philosophy