Retirement plan sponsors are an essential component of the U.S. retirement system. Plan sponsors oversee the operations of virtually all retirement plans, hiring the service providers who perform work for the plans, selecting the investments that generate returns and generally helping to ensure that plan participants can meet their retirement goals.
But for plan sponsors to do their critically important work, they need to be appropriately and completely informed of their role and duties. Unfortunately, recent writing on the responsibilities of plan sponsors has failed to accurately portray the duty that sponsors have to act in plan participants' best interests.
A recent example of this problematic approach is "Defined Contribution Plans: Challenges and Opportunities for Plan Sponsors."This guidance for plan sponsors, written by Jeffery Bailey and Kurt Winkelmann, has recently been published by the CFA Institute Research Foundation.
Messrs. Bailey and Winkelmann inaccurately summarize a plan sponsor's role as follows: "An investment committee's first responsibility is to do no harm." In their view, plan sponsors both fulfill their responsibilities and make their work less complicated by reflexively favoring passively managed investments over actively managed ones.
However, while "do no harm" is the core of the Hippocratic Oath that doctors take, plan sponsors are held to an even higher standard. Under the Employee Retirement Income Security Act of 1974, plan sponsors are fiduciaries who have both a duty of care and a duty of loyalty to plan participants and their beneficiaries. This is one of the highest standards in the law, and it requires that fiduciaries act in the best interest of their clients at all times.
Under the fiduciary standard, plan sponsors can't default to simplistic rules of thumb when selecting investments for a retirement plan.
So, what's a plan sponsor to do?