Combating Common and Unfamiliar Fiduciary Mishaps

Two fiduciary compliance experts highlight the mistakes plan sponsors are making that can land them in hot water under ERISA—some common and others more obscure.

Deferral failures and incorrect vesting aren’t the only oversights sponsors should be wary of; many other fiduciary snares can trip them up.

Lori Lucas, executive vice president and defined contribution (DC) practice leader at Callan Associates, emphasizes the chance of errors in recordkeeper monitoring and evaluation, plan fee reviews, adherence to the investment policy statement (IPS), picking fund lineup options, and more.

Lucas shares this list in her recent article, “Avoiding Fiduciary Traps: 8 Tips for DC Plan Sponsors.” The analysis, stemming from results of Callan’s 2017 DC Trends Survey, stresses a need for broad education surrounding plan sponsors’ roles as fiduciaries.

She suggests plan sponsors and advisers can turn directly to the DOL for guidance about how to ensure compliance. Recently, the department has issued major pieces of guidance on meeting the requirements of its fiduciary rule and other regulations.

When it comes to the investment menu, Lucas points to the importance of implementing and adhering to a well-crafted investment policy statement. According to the Callan analysis, only 60% of sponsors have reviewed their investment policy statement over the last 12 months, with 45% both reviewing and updating it. While the DOL and the Internal Revenue Service (IRS) have not required that all plans adopt an IPS, Robert Lawton, founder and president of Lawton Retirement Plan Consultants, argues that “probably there should be an IPS for every retirement plan, as a fiduciary best practice.”

What makes the IPS so necessary, Lawton says, is its ability to create a stable, regulated process around plan management—especially in the selection and monitoring of a plan’s investment fund lineup.

“The most important thing to understand about fiduciary compliance is that it’s a process, and it’s a process that has many steps,” he observes. “If you don’t create a repeatable and documented process, or if you fail to adhere to the policies you have pledged to, that can also result in a fiduciary breach.”

Lawton says that recording meeting minutes is necessary, but remaining concise is key.

“Sometimes for one hour meetings, I’m seeing minutes that are four or five pages long,” he explains. “That’s way too long. It may be more appropriate to focus on documenting decisions that are made, with less focus on detailing the intermediate discussion. Generally meeting minutes should be about one-page long and they should be concise.”

Another mishap Lucas mentions is “leaving too much up to the plan’s recordkeeper.”

“Some plan sponsors are under the impression that vendors like their recordkeepers will take care of all of the things needed to be taken care of in regards to compliance under the fiduciary rule,” she says. “That’s really a trap, because the plan sponsor is the plan fiduciary and at a minimum, they need to oversee compliance with the fiduciary rule. They can’t just assume that it’s being done properly; they really need to take the responsibility for overseeing the compliance effort.”

Related to this, Lawton believes sponsors should “take caution when employing and working with investment advisers,” and urges them to stay away from advisers that could be subject to conflicts of interest based on the compensation arrangements.

“[Commission-based] investment advisers who work for brokerage firms, banks or insurance companies can be conflicted because they have products to sell and they work for their company and not for the client,” he says. “A good investment adviser who is not conflicted helps plan sponsors avoid fiduciary problems and missteps. Working with the right adviser who is not conflicted can have big impact.”

Both Lawton and Lucas recommend simplified and streamlined investment menus in the interest of ensuring fiduciary prudence. Rather than accumulating choices and the potential for confusion for the sake of the one or two stock-pickers present in a given plan population, they urge the use self-directed brokerage windows.

“Every five to 10 years, do a very in-depth look at your lineup,” Lucas concludes. “The lineup should have all of the features that are consistent with your plan’s demographics, and there should be no excess expenses or fees assessed to participants.”