Phil Fiore, senior vice president of UBS Institutional Consulting, recently discussed some best practices in this area, for plan sponsors and fiduciaries, with PLANSPONSOR. Christopher Thomas, director of Corporate Retirement Plans for Planning Solutions Group, based in Fulton, Maryland, also offered recommendations on the subject.
Review the investment policy statement (IPS) at least annually.
In terms of particular items to review, the Stamford, Connecticut-based Fiore says, “A good best practice is to have more concrete metrics for evaluating funds, which leads to better process outcomes. This way, there is a mechanism or repeatable process by which investment committees and plan sponsors can look at each fund. We know that everyone is on the same page in terms of how the fund is being evaluated.”
Thomas adds, “Part of the criteria that should certainly be addressed in the IPS is acceptable fees for the investment options to be included in the plan. This can be done by setting a ceiling or maximum acceptable fund expense.”
Fiore also emphasizes that the IPS is a living document that needs to be updated to reflect changes in the real world. “Don’t just write the statement, file it and never review it again. It’s like a blueprint for building a home. Inevitably, changes will need to be made,” he says.
Document the rationale for adding or removing investments from the plan.
Fiore says, “It’s about making sure that the decisionmaking process is well documented. It is imperative that processes be properly maintained.”
Review plan fees periodically through requests for information (RFIs) and requests for proposal (RFPs).
“I believe it’s the obligation of plan sponsors to ensure that plan-related fees are reasonable,” Fiore says. To that end, he suggests that every three to five years, plans sponsors and fiduciaries send out RFIs and RFPs to recordkeepers in order to benchmark the fees and services the plan is receiving.
Plan sponsors and fiduciaries should also pay close attention to proprietary investments such as target-date fund suites, says Fiore. “Make sure that it’s the right suite from a fee standpoint and the right one from a participant demographic standpoint.” Also, Fiore advises that the Department of Labor (DOL) website (www.dol.gov) be consulted for the agency’s tips on evaluating target-date funds. This way, if the DOL ever audits the retirement plan, plan sponsors and fiduciaries will be able to clearly articulate why they chose that particular suite of funds.
Review periodic benchmark studies to determine if the plan’s fees continue to be reasonable.
Fiore says, “Benchmarks give a good estimate as to whether your plan is comparable to others. Don’t be afraid to take your recordkeeper to task and ask them to justify why fees are the way they are. If a fee is high, understand why that’s so.”
Continuously run the plan in the best interest of participants.
Fiore says that it is the duty of plan sponsors and fiduciaries to ensure that the plan operates in the best interest of participants and not favor other parties such as recordkeepers or investment managers. “Plans are under more scrutiny these days, not less. Plan sponsors need to look at the overseeing of fees and investment option choices as a significant fiduciary duty,” Fiore says.
Until the last several years, fees were primarily monitored or re-assessed as the asset size of the plan grew, notes Thomas. “Now plans might be able to lower their fees without a substantial change in their demographics because of two forces: regulations that have improved fee transparency (Employee Retirement Income Security Act (ERISA), Sections 408(b)(2) and 404(a)(5)) and increased competition from low-cost ETFs [exchange-traded funds] and passively managed funds.”
ERISA disclosure requirements have brought about greater fee transparency to employer-sponsored retirement plans (see “Fee Suit Litigator Discusses Best Practices”).
Establish a checklist for the plan’s investment committee.
Fiore says, “A plan’s investment committee should meet at least quarterly and the more disciplined the process is, the better. There should be a consistent outline or checklist of how funds and fees are going to be evaluated. Decisions also need to be made with an eye toward be able to defend them if need be.”
Thomas recommends that plan sponsors and fiduciaries should: (1) know what the plan’s expenses are; (2) have an IPS tailored to the plan’s size and demographics; (3) review the IPS with an retirement plan consultant to determine if the fee parameters need to be adjusted because of plan asset growth and/or competitive forces in the investment manager universe; and (4) understand that the lowest fee fund is not always the best solution.
Plan sponsors should also look to an independent retirement plan consultant for objective research on funds to support their ultimate decisions made for investment choices and fees, says Thomas. “It also has to be kept in mind that fee parameters will change as the investment universe continues to evolve and the participant demographics change,” Thomas says.
“Your plan consultant should help identify which investment managers’ track records warrant paying a higher expense versus a lower expense alternative,” Thomas explains.
In establishing fee parameters, says Thomas, plan sponsors and fiduciaries need to determine maximum expense ratios allowable, as well as gearing parameters to different asset classes. For example, he explains, a 1% expense ratio might work best for a small-cap fund, while 60 basis points may be appropriate as a limit for a core bond fund.