Fiduciary Risk, Fees and Fund Performance 

Key Takeaways: 
  • Fiduciary responsibility does not hide under a corporate umbrella. It is a personal responsibility and therefore a personal risk. 
  • Fees can be the most controversial feature of a retirement plan, and they often are at the core of lawsuits brought against plan sponsors. 
  • A retirement plan’s investment fund performance should be measured and benchmarked at least annually. 

 

Navigating the complexities of retirement plan sponsorship is a multifaceted responsibility that demands an understanding of the Three F’s: fiduciary risk, fees, and fund performance. These elements form the cornerstone of a plan sponsor’s duty, each carrying its own set of challenges and legal implications. Plan sponsors must tread carefully, as their actions—or inactions—can impact the financial well-being of plan participants.

Fiduciary Risk 

If you invest your own money and manage those investments, the only risk you assume is that you may lose your money, but there is no legal risk. However, the minute you start managing money for other people – the way retirement plan sponsors manage funds for their participants – you have assumed a legal fiduciary responsibility.  

This means you have an ethical and legal responsibility to act in the best interests of the plan participants.

It may sound simple, but there are many nuances in the fiduciary relationship. And it is most important to remember fiduciary responsibility does not hide under a corporate umbrella. It is a personal responsibility and therefore a personal risk. If the person making decisions for a retirement plan does not follow established legal and ethical protocols, they are personally liable. 

As a plan fiduciary, you have oversight responsibilities for many areas, including: 

  • Fee structure – Retirement plan investments are subject to fees on investment funds that are charged by the plan provider. Some players in the industry have a history of charging excessive fees, which many plan sponsors do not understand. Since the fees are often passed on to plan participants, the plan sponsor has a fiduciary duty to ensure all fees are reasonable and they are stated clearly. 
  • Investment process – Best practices in selecting and monitoring investments are key to improving participant utilization and to ensuring the sponsor’s fiduciary responsibility. 
  • Provider management – Best practices in selecting and monitoring service providers, resolving service issues, avoiding conflicts of interest, protecting participant data and mitigating cybersecurity risk are all part of fiduciary responsibility. 

A key best practice for all fiduciaries is to document everything you do.

If the Department of Labor or the IRS – the two federal agencies overseeing workplace retirement plans – audit your plan, they will look for information going back three or four years, and they want to see documentation of policies and procedures. They will judge everything from your investment policies to plan features, holding it up against an “expert” standard. It’s easy to see why documentation must be complete and up to date. 

Fees 

Fees can be the most controversial feature of a retirement plan, and they often are at the core of lawsuits brought against plan sponsors. Since the majority of plan fees are passed on to participants, the standard on which a plan is judged is whether it includes a prudent process for keeping the fees reasonable. Many plan sponsors are not aware of their fees and have no plan in place to control them. 

Several best practices can help plan sponsors ensure fees are reasonable: 

  • Benchmarking – Plan fees should be tracked, documented and benchmarked at least annually to assess the reasonableness of compensation in light of the services provided. 
  • Investment fees – Disclose and evaluate all fees inside of the investments. This includes management, sub-TA, 12b-1, commissions and the total investment fee.    
  • Recordkeeping fees – When possible, use a fixed per head fee arrangement over an asset-based fee. For instance, in a period when plan assets double, your service provider’s compensation would double when using asset-based fee. When using a fixed per head fee arrangement, the service provider’s compensation would stay the same.   
  • Expense ratio – All funds should have an expense ratio that ranks in the lowest quartile of peers. 
  • Fee allocation – A fee allocation study should be conducted at least every two years. 

Example – One organization’s experience serves as an example of the impact fees can have on a plan. The organization had $55 million in participant funds in the plan, which was administered by a large national investment house. The investments in the plan were all the most expensive share classes available. If the organization had had the same amount of money invested at the same investment firm in lower-cost funds, they would have saved $185,000 a year in fees. 

It should be noted that investment performance need not be sacrificed when investing in lower-cost share classes. 

Fund Performance 

As with fiduciary risks and fees, a retirement plan’s investment fund performance should be measured and benchmarked at least annually. Performance is perhaps the plan feature that participants care most about, and healthy performance goes a long way toward encouraging non-participants to become participants. It also can encourage participants who are able to increase the amount of salary they are deferring to the plan. 

Best practices to ensure strong investment performance include: 

  • Investment Policy Statement – An investment policy statement should be included in the plan to guide the selection of investments, and the number of investment options in the plan should be limited to no more than 10. 
  • QDIA selection – The plans Qualified Default Investment Alternative (QDIA) should be selected according to Department of Labor guidance and the selection should be documented. (A QDIA is the investment used when a participant contributes to the plan without having specified how their money should be invested.) 
  • “Watch List” – There should be a formal watch list process in place to monitor and replace underperforming funds. 

Questions? 

Adams Brown Group Benefit Services can provide a Strategic Plan Assessment to help you assess and improve your retirement plan. Contact an Adams Brown advisor.