Establishing a Fiduciary Due Diligence Process

In his presentation Webb said 403(b) sponsors should review fiduciary practices to maximize investment results and establish a process that helps protect the plan, participants, and the organization from liability. A focused review also confirms that the plan is deriving value from fees that are paid and is maintaining compliance and competitiveness in the industry.

According to Webb, the goals of the due diligence process are:

• Overall monitoring of the investment performance of the funds, as well as the asset classes offered to participants, expenses of the funds, and the extent to which participants are diversifying their investments;
• An analysis of the plan’s participation, with a focus on ways that sponsors are changing their programs to increase participation;
• A discussion on ways that the plan is communicated today, versus other approaches which have been successful in the industry;
• Periodic review of the plan’s operation, its provisions, and any applicable compliance requirements; and
• Review of new trends in the retirement plan industry.

Webb said creating an investment policy statement (IPS) and establishing a committee for regular due diligence meetings are integral parts of establishing a due diligence process.

The IPS can guide regular investment reviews, in which Webb suggested sponsors should learn:

• Funds’ performance against standard benchmarks and other similar funds;
• The level of risk taken by a fund versus the return it attains;
• Cost of the fund versus others like it, and whether there has been a style change;
• Whether there has been any change in management recently or in the fund company; and
• What global economic conditions exist and how do they interact with the fund.

Fiduciaries should make sure the investments conform to the IPS and are appropriate for the participant demographic and general organizational needs and desires.

Regularly scheduled committee meetings are a time to discuss best practices and new trends in the industry for participant education, plan design, and investment analytics, among other things. Webb said the committee should also discuss difficult plan issues and decisions and ensure adherence to the due diligence and fiduciary review process.

Webb also said the due diligence process should include coordinated educational campaigns for participants. The subject of the educational campaigns can be guided by plan statistics, such as the number of participants who are not diversified in their investments (all in fixed income vehicles or all in equity), participants who use more than one target-date fund or a target-date fund and other investments, the plan's rate of participation, or the average participant contribution percentage, among other things.

Webb suggested sponsors use different media for the education, including e-mails, podcasts, group meetings, and written communications.

Sponsors should regularly consider participation improvement methods such adding an automatic enrollment feature to the plan or stepping up enrollment drives.

In addition, making sure the plan is in compliance with regulations should be an ongoing part of any due diligence process. This includes addressing any vendor concerns, contractual requests, or participant complaints.

Webb said the ongoing due diligence monitoring could lead to plan design changes (employee or employer contribution provisions, eligibility requirements, vesting, etc.) and/or issuance of a request for proposal (RFP) from plan vendors to ensure regulatory compliance and that the plan meets participant and organizational needs.