PSNC 2011: 10 (More) Things You’re (Probably) Doing Wrong

July 11, 2011 ( – A panel at the PLANSPONSOR National Conference discussed 10 things retirement plan sponsors are probably doing wrong as fiduciaries.

Failure to properly select and monitor target-date funds   

Fred Reish, Chair, Financial Services ERISA Practice, Drinker, Biddle & Reath LLP, says sponsors should focus on themselves instead of on what all mutual funds and investment experts are telling them. There are two steps to deciding what target-date fund is right for their plan. First, sponsors should understand their employees; if they are in an industry where if there is a recession older employees could get laid off or retired, then they need to have a conservative glidepath, if they are with a high tech industry where employees make a lot of money and are always going to be employable, that suggests they could have a more aggressive glidepath.  

Secondly, Reish says sponsors should know their plan; if by and large employees leave and take lump sum distributions, then sponsors should use a glidepath that stops at retirement age. Reish contends that if a glidepath goes past retirement age, that is equivalent to the employer making decisions for participants after retirement. So, if sponsors are not going to educate participants and try to keep them in the plan, the target-date should just get them to retirement by conservatively investing, especially during the years right up to retirement.  

From the perspective of a plan adviser, Stace A. Hilbrant, Managing Director, 401k Advisors LLC, says it is important to benchmark target-date funds; learn when the glidepath ends and what the allocation is to equities. He adds there are tools out there to do this.  

Failure to independently document items such as investment reporting processes, any vendor review activities, vendor benchmarking, fund/fee/expense benchmarking, etc.   

Hilbrant says sponsors should independently and objectively monitor their plan’s activities, and take the plan to benchmarking, or a request for proposals (RFP) once in a while. Reish, adds that there is some guidance from the U.S. Department of Labor that says documentation is an important part of the prudent process of running a plan. Every prudent process has same outcome, an informed and reasoned decision. Reish says it is the non-decisions that are going to catch plan sponsors, the things they don’t monitor.  

Failure to benchmark services   

According to Reish, in the years ahead plan sponsors will be benchmarking two ways, for fee disclosures and for plan design. To benchmark services, look at results. For example, Reish says if the provider offers enrollment services, how is the level of participation in the plan against peer groups of the plan. For education campaigns, see if there is improvement at the end.  

Hilbrant adds that in addition to benchmarking results, sponsors have to benchmark returns on investments, expenses.  

Hilbrant suggests if sponsors don’t feel comfortable doing it themselves they should hire an expert. Even if they don’t have an adviser, there are firms that will do project work.

Failure to review service provider agreements   

Reish says most plan sponsors don’t know what is in their service agreements. Two things to look out for is some service providers don’t give sponsors their agreements until money is supposed to move; sponsors should get the agreements early and review them.  

Secondly, Reish says there are provisions in service agreements to which sponsors should object, such as what the provider’s liability is, and how much time sponsors have to object to testing results. The sponsor has the money, so the provider should listen to it.  

Relying on legal staff not familiar with ERISA to review or approve service agreements   

Hilbrant says sponsors should retain qualified ERISA counsel to review service provider agreements. Many have an attorney they have used for many years and have a good relationship with, but if that counsel has no special knowledge of ERISA, there are a lot of things in the agreements they are likely to not object to that are actually acceptable.  

Failure to vet and document the credentials of your adviser  

According to Hilbrandt, when sponsors are asked questions about why they hired a certain provider, they can’t say the provider seemed good or everybody loves them. Sponsors should ask providers annually to give them their credentials, licenses, awards, and recognition. 

Reish adds that sponsors should make sure their adviser has clients with comparable plans, it will affect their knowledge and pricing. Also, make sure the adviser is focused on their plan type - 401(k) or 403(b) – it should be at least half of their business.  

Failure to even attempt to determine if the compensation paid to current adviser/broker is, could be, or should be considered “reasonable”   

Hilbrandt contends that many plan sponsors have no idea what their broker or consultant on their plan is earning. They should ask every so often and make an attempt at determining what is reasonable or not. He says the most simplistic way is to take the annual fee and ask how many hours they are spending a year with the plan.  

In the determination, Reish says sponsors should consider the value proposition of their plan to participants, what value the participants perceive. It’s an issue of value, not just cost; sponsors can pay more, but if they get more services, it’s ok.  

Failing to prepare plan participants and plan fiduciaries for the impact of fee disclosure regulations  

According to Hilbrandt, there’s been enough time since fee disclosure guidance was released to expect that advisers will be educating participants right now about what disclosures they will see. And, sponsors should have already received advanced copies of sample disclosures from providers.  

Not aware of/not using proper definition of compensation per the plan document   

Reish contends that most plan failures occur due to plan sponsor actions, not service provider actions, and it is shockingly common for plan sponsors to report the wrong compensation to third party administrators.  

Failure to properly treat affiliated companies   

According to Reish, there are a certain number of employers covering employees they do not have documentation for, or not covering employees they have documentation for. He says this most often happens when there is a merger or acquisition.