DC plan executives often worry about landing in hot water for doing the wrong thing. However, many fiduciary issues crop up because plan sponsors have failed to take action. Callan lists eight potential fiduciary traps — and ways for executives to avoid falling into them in 2017.
Trap 1: The plan's record keeper calls the shots.
Nearly 4 in 10 DC plan sponsors are either unsure about what areas of their plan will be affected by the Department of Labor's 2016 Definition of a Fiduciary rule, or believe there will be no impact, according to Callan's 2017 DC Trends Survey. Callan recommends: Conduct comprehensive due diligence regarding any planned changes to the plan's website, call center or other participant communications before signing off with your record keeper.
Trap 2: A haphazard approach to plan fee review.
DC plan fee litigation can be both costly and time consuming. Yet less than two-thirds (63%) of 401(k) plan executives had both calculated and benchmarked plan fees within the past 12 months. Callan recommends: Evaluate investment management and administrative fees at least annually in order to understand if the plan qualifies for lower fee options.
Trap 3: The investment policy statement gets stale.
The DC landscape is constantly changing, and it's important that the plan's investment policy statement keep up. Yet only 60% of plan executives have reviewed their IPS in the past 12 months, and less than half (45%) have reviewed and updated it. Callan recommends: Refresh the IPS to reflect the current state of the plan and the defined contribution environment.
Trap 4: Investment committee members learn as they go.
Plan sponsors list a wide swath of individuals making the investment and administrative decisions for DC plans. These decisions can be complex and have broad consequences, affecting the retirement outcomes of thousands of workers. Callan recommends: Make formal annual fiduciary training, and training for new committee members, a part of the investment committee agenda. Include training on best practices, regulations, litigation and DC trends, as well as a refresher on what it means to be a DC plan fiduciary.
Trap 5: Fund lineup creep.
When faced with too many choices, DC plan participants become overwhelmed. They might forgo plan participation altogether or end up with suboptimal choices. While most plan sponsors embrace the concept of a streamlined DC plan lineup, in reality investments continue to proliferate. Callan recommends: Before adding a new fund to the lineup, plan executives should consider questions including, “Will the new fund enhance diversification opportunities or simply clutter up the fund lineup, making it more difficult for participants to navigate?” and “Should we first formally re-evaluate the fund lineup (before adding more funds)?”
Trap 6: View managed account providers as commodities.
Many managed account providers view the DOL's Fiduciary Rule as an opportunity to introduce (or reintroduce) their services to plan sponsors and participants. Yet not all managed account services are created equal. Callan recommends: Fully test the managed account service provider's advice; provide test scenarios and compare managed account fee schedules.
Trap 7: No audit of the plan's security protocols.
Respondents to Callan's 2017 DC Trends Survey ranked “auditing security protocols” low on the list of actions taken in the past 12 months to improve the fiduciary position of their DC plan. But a breach can be devastating. Callan recommends: Understand the security protections that DC plan providers have in place, the protocols for notification if there is a security breach, and remedies in such an eventuality. This should all be codified in the plan's service level agreement.
Trap 8: Sloppy documentation around decision-making.
Plan sponsors that do not document their decision-making in meeting minutes and other written records provide low-hanging fruit for plaintiffs' attorneys. Callan recommends: Designate time to review all plan documentation, including a periodic review of the investment structure, the suitability of the qualified default investment alternative, ongoing fund performance monitoring and the plan's fee payment policy.
Fiduciary traps are best avoided by creating a game plan to tackle them one by one during the course of the year. Callan recommends scheduling and addressing them regularly, for example:
Q1: Evaluate the record keeper's approach to conforming to the Fiduciary Rule and review documentation procedures;
Q2: Evaluate the investment structure and managed account provider;
Q3: Fiduciary training and fee review; and
Q4: Audit security protocols and update the IPS.
Developing this type of game plan early in the year can help to ensure that 2017 doesn't draw to a close with the same old fiduciary traps just waiting to spring.
Lori Lucas is defined contribution practice lead at Callan Associates Inc.