In a January 2019 401K Specialist article, Fred Reish, a well-known ERISA attorney, addressed the topic of fiduciary education for plan committee members. The genesis of the article was Reish’s analysis of court decisions, which led him to worry “that fiduciaries may not be adequately educated about their basic responsibilities and, particularly, their administrative oversight duties.” The article resonates with SLD; based on our extensive experience auditing plans, we have had similar observations. Summarized here are some of Reish’s thoughts about fiduciary education, supplemented by our own.
In the article, Reish identifies four broad areas that require a better understanding by plan fiduciaries – plan provisions, investment policy statement, plan expenses, and DOL ‘hot topics.’
(1) Plan Provisions
Do your committee members know who appoints the members and monitors the committee? Do they know the provisions of the plan and what their responsibilities are? Responsibilities include oversight of enrollment, investments, service providers, plan expenses, loans, distributions, and more. To address these matters, fiduciary training should include a review of the plan committee charter and the summary plan description. These reviews could be complemented by having service providers and employees responsible for administrative activities of the plan present to the committee on how they carry out these activities in accordance with the plan provisions.
(2) Investment Policy Statement (IPS)
Although not required to be investment experts, committee members must still understand the basics of the plan’s IPS. This includes knowing the type and purpose of the investments in the plan menu, and ensuring that the investment menu is consistent with the IPS. The plan’s advisor should review the IPS with the committee on an annual basis. If some or all of the committee members are uncomfortable about their investment knowledge, then consideration should be given to engaging with an advisor who offers discretionary investment management services. A 3(38) advisor, for instance, has the discretion to make fund decisions, reducing sponsors’ fiduciary risk for investments.
(3) Plan Expenses
Plan expenses can be grouped into two main categories: investment (e.g. mutual fund expense ratios) and administrative (e.g. recordkeeping, TPA, custodial, etc.). A common claim in fiduciary breach litigation is that the committee-selected investment options are too expensive. Understanding fund expenses is closely linked to understanding the plan’s investment options (discussed in #2, above). Therefore, the plan advisor is well-suited to provide appropriate education to committee members. It is also important that the committee retain an advisor who specializes in 401(k) plans and, therefore, is knowledgeable about available share classes and reasonable expense ratios for funds offered by the plan.
Plan administrative expenses can often be difficult to grasp due to revenue-sharing arrangements. Additionally, the basis for certain expenses may not be appropriate. Plan committees should make sure they understand the basis for their plan expenses. One way would simply be for an advisor and/or recordkeeper to go over, annually, the amount of expense and how it’s determined. To assess the reasonableness of the fees, a benchmarking service or requests for proposals could be solicited by the committee every three to five years (unless there have been significant changes with the plan).
(4) DOL ‘Hot Topics’
Committee members should be aware of what the DOL is focused on. Two current ‘hot topics’ are late deposits of participant deferrals and insufficient efforts to locate missing participants. These are topics a good advisor could address with the committee.
Plan committee members have an obligation to make sure the plan is working in the best interest of the participants and shouldn’t take their responsibilities lightly. Annual fiduciary education for all committee members and separate education for new members, as required, should be a staple of all plans. A knowledgeable independent advisor, who specializes in 401(k) plans, can be a big asset to help ensure committee members are well-versed in their fiduciary responsibilities. If you have any questions about your specific situation, please contact SLD.