Fred Reish, partner at Drinker, Biddle and Reath, had intended to discuss the Department of Labor’s (DOL) fiduciary rule during his session at Plan Sponsor Council of America’s 71st Annual National Conference; however, given the latest development—the 5th U.S. Circuit Court of Appeals vacated the rule—he said there was not much to discuss about it at this point.
Yet, retirement plan sponsors still need to pay attention, plan sponsors have had a duty since the passage of the Employee Retirement Income Security Act (ERISA) to identify conflicts-of-interest of all service providers and protect employees from them, he said. For example, if a recordkeeper is getting paid revenue sharing from recommending its own funds for the plan or if an adviser is paid based on which investment he or she recommends, plan sponsors have a duty to know and avoid those conflicts.
Recently, the Securities and Exchange Commission (SEC) has proposed a fiduciary rule of its own, but Reish said it focuses on non-discretionary advice, does not focus on plan sponsors, and it will be at least a year and a half before any kind of final rulemaking would come out of that proposal.
Instead, Reish focused his discussion on general fiduciary duties of ERISA plan sponsors. He noted that courts have applied what is called the “two hats” doctrine—employers and retirement committees are fiduciaries when representing plan participants, but they are not fiduciaries when they represent the employer, i.e. when performing settlor functions, such as amending the plan.
Reish said from his perspective there is a third hat, what he calls the “best practices hat.” He explained, “Plan sponsors have an option of going beyond looking at what benefits the participants or employer. Meeting minimal objectives of the law is not the goal.”
According to Reish, plan sponsors and retirement plan committees should have a microscope, looking at what’s in front of them in great detail and saying, “I have to make a great decision.” They should also have a periscope, used to find what they don’t know—what are emerging issues, what are they able to get sued for that is not under the microscope today.
According to Reish, there are three steps for fiduciary protection (where most litigation occurs):
- Review expense ratio of investments – He said fiduciaries don’t have to choose the cheapest investments, but ones that are reasonably priced relative to what is available to the plan;
- Obtain lowest cost available share classes – Reish cited the Tibble v. Edison case, in which the plan sponsor had retail share classes in its multi-billion dollar plan when it should have had offered institutional share classes. He said the key is to ask what is available to the plan. He pointed out that in the case, an expert said some of the investments used had minimum investment requirements, but when asked whether fund managers would waive minimums if requested by plan sponsors, the expert said that’s true;
- Monitor compensation of recordkeeper – Reish cited the Tussey v. ABB case, in which a consultant told a plan committee that a reasonable cost for recordkeeping is about $70 per participants, but the plan committee ignored that, and the recordkeeper was getting more when adding up direct cost and revenue sharing. Reish suggested plan sponsors calculate every year how much the recordkeeper is getting paid and benchmark it every two to three years. He said to calculate it dollar-wise (both revenue sharing and what participants pay).
Reish suggested plan sponsors and retirement plan committees allocate a fair amount of time to these topics. But, he noted that plan sponsors are picking up on this, citing Callan research that showed 83% calculated fees in last year, 41% reduced fees after a fee review, and 52% are somewhat or very likely to switch to lower fee share classes. “Investment committees focus on investment performance, but if they are not looking at these three things, they are not aware of where risk is at,” he said.
Reish offered three more fiduciary considerations:
- Don’t use conflicted advice – Plan sponsors need to understand conflicts and the basis of advice—whether the advice provider can make more money off of a certain recommendation;
- Review and improve cybersecurity – Reish said this is the biggest emerging issue in the retirement industry. Plan sponsors should ask what the recordkeeper has in place to protect participant information;
- Monitor target-date funds (TDFs) – Reish contended that not much time is spent on assessing TDFs’ glide paths to see if they are appropriate for the participant demographic.
According to Reish, issues to consider when monitoring TDFs include:
- Where is participant money going?
- Is the TDF designed to be aggressive, moderate or conservative?
- Is that design appropriate for the participant demographic?
- How are TDFs performing relative to an “appropriate” benchmark?
Reish noted that a study found there is bias in investment deletions—recordkeepers remove just 13.7% of affiliated funds in the lowest performance decile, but 25.5% of unaffiliated funds in lowest performance decile. There were similar results for the addition of funds. “That’s a conflict of interest for the recordkeeper. Plan sponsors must identify, understand and mitigate this.”
In his view, Reish said, the solution is to hire an independent, non-conflicted adviser to select and monitor investments. He suggested the adviser should also agree to be a fiduciary, meaning they are held to the same standard as plan sponsors. In this case there would likely be few, if any, conflicts of interest
Reish said plan sponsors should put every decision in writing. “In litigation, there is a difference between ‘truth’ and ‘proof,’” he told conference attendees.
Finally, Reish offered what he calls “best practices” in plan design:
- Use all automatic plan features;
- Provide participants with retirement income projections and a gap analysis; and
- Provide education to participants age 50 and older, i.e. how much they will need for retirement, whether they are on target, how and when to claim Social Security and how Medicare works.