Failing to correctly analyze plan expenses to determine if they are legitimately payable from trust assets.
Carol Cachey, an attorney at Hewitt Associates, said the Department of Labor pays attention to expenses paid from plan trusts. She reminded attendees that basically settlor functions cannot be paid with plan assets. These include things such as expenses for the formation of the plan, business decisions such as a reduction in force, and plan amendments to add features to the plan. Costs of plan administration and plan amendments required by legislation or rule changes, however, may be paid from the plan trust.
Cachey warns that expenses paid by the trust must be reasonable and the DoL will ask why they are reasonable. Michael Kozemchak, Managing Director at Institutional Investment Consulting, an NRP member firm, adds sponsors should not assume that the recordkeeper or third party administrator for the plan is taking care to apply expenses properly.
Failing to understand the protection offered under section 404(c), and incorrectly thinking it extends to the duty to prudently monitor the investment offerings under the plan.
Cachey notes that the federal appellate courts may be divided on the application of 404(c), but the Department of Labor has been clear on its view. The section protects the effects of participants’ exercise of discretion in investment choice, it does not offer protection in sponsor selection and monitoring of investments. Sponsors must still employ a prudent process in selection and monitoring.
Not complying with QDIA notice requirements.
Jania Stout, Vice President and Retirement Plan Consultant with Fiduciary Consulting Group of PSA Financial, notes that there are seven notices plan sponsors must keep up with annually, and many think delivering them electronically is ok, but there are several regulations for electronic notices and plan sponsors can’t always meet them. For example, if notices are delivered electronically, sponsors must get electronic consent from participants and must keep a copy of the consents. Also, sponsors cannot just post notices on the company Intranet or just include them in Summary Plan Descriptions.
Heedlessly relying on skimpy investment policy statements.
Cachey says sponsors should have an investment committee in place that understands the plan’s portfolio and the investment goals, and the committee should do an annual investment review.
Not following provisions of the plan document.
Cachey said it is also a good idea to do an annual plan review. She notes that it is cheaper if the sponsor finds and error and admits to it than if the Internal Revenue Service or DoL find an error themselves.Kozemchak also suggests sponsors keep a close eye on how the recordkeeper is running the plan.
Not doing enough due diligence on selecting and monitoring fund options.
Kozemchak says the key in selecting and monitoring funds is to memorialize the process. He suggests sponsors do an RFP every five years to see if there are less costly options, and not only look at the reasonableness of costs, but evaluate what services are being received for those costs.
Not knowing (or failing to ascertain) if plan fees are reasonable.
Stout says sponsors should get help benchmarking plan fees as they usually don’t have the expertise.
Failing to separate responsibilities of plan committee members.
Cachey says sponsors should have a document charting the duties of each committee member and follow it. Also, committee members should understand their fiduciary responsibility to the plan.
Cachey suggests sponsors set up procedures and follow them. She says they can look for checklists online to get started.
Kozemchak adds that a competent consultant can educate plan committee members on good plan governance practices.
The final mistake panel members say plan sponsors make is:
Not seeking the help of experts when they lack the expertise to make fiduciary decisions impacting the plan.
Audio of the panel presentation is here.
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