403(b) Sponsors Could Improve on Investment and Plan Monitoring

December 14, 2010 (PLANSPONSOR.com) – A newly released study by the Profit Sharing/401(k) Council of America found less than half of 403(b) plan sponsors have an investment committee in place, and only 9% monitor whether participants are on track for retirement.

PSCA’s 403(b) Plan Response to Changing Conditions found that only 46.6% of the 403(b) plans responding in the survey report forming a committee responsible for reviewing investment option performance and plan compliance. This compares to nearly 94% of 401(k) plans reporting having such a committee.  

Aaron Friedman, national practice leader for non-profit consulting at The Principal, says as 403(b) plans evolve toward more active sponsorship and fewer providers, more will create an investment committee. Putting a committee in place to monitor investments and plan administration is one step in the process of taking fiduciary responsibility.  

According to Friedman, an investment committee helps Employee Retirement Income Security Act (ERISA) sponsors with the fiduciary requirement to act with prudence, and a committee following a well designed investment policy statement (IPS) is a means to demonstrate due diligence and prudence is being met. In addition, Friedman notes, the Department of Labor and the courts are more likely to back a sponsor if a reasonable procedure is in place. “A good defense is a good offense,” he says.  

Friedman suggests sponsors work with an adviser to form a committee, and document what the committee will do, who will be on the committee and what each is responsible for. Who is on the committee will depend on the facts and circumstances of organization. Friedman says there is no general rule; it will depend on the nature of the organization, who makes decisions, the organization’s relationship with personnel, and how involved employees are. Sponsors should also develop an IPS that will be followed by the committee.   

The Principal offers a white paper on investment committee best practices here 

Friedman says monitoring whether participants are on track for retirement is a new trend for any plan type, but particularly for 403(b)s as plan sponsors have not had to pay attention to participant accounts previously. Now, sponsors of all types of retirement plans are realizing that having a plan is not enough, they must do more to make the plan effective. The trend has naturally evolved also as technology has improved and sponsors have begun to look at plans from a business standpoint. However, the trend has been highlighted by the market downturn.  

The most effective way to measure whether participants are on track is to monitor the accumulation of assets. Friedman suggests sponsors use some modeling to see what participants need to save for retirement. He says stepped up participant education, automatic enrollment and escalation, and one-on-one guidance like The Principal’s Retirement Secure are all tools sponsors can use to make sure participants are on track.  

The Principal offers a white paper on retirement plan success here 

Though there is room for improvement for 403(b) sponsors, Friedman says the PSCA survey is very telling (see 403(b) Plans Surviving the Economic and Regulatory Climate). It shows 403(b)s are adapting to new regulations and coping with difficult economic times, and, according to Friedman, “there are areas of evolution going on that create opportunities for advisers to help plan sponsors offer effective and responsible retirement plans.”