Fiduciary Governance Best Practices is a Process and it is Documented
The first rule for plan fiduciaries to understand is they must put their own interests last. ERISA’s test of fiduciary prudence is based on conduct of the fiduciaries. It is not based on the results of their conduct. So what are you to do to demonstrate best practices as it pertains to fiduciary conduct? With Kaizen, we will develop and implement the following fiduciary governance items for you:
Develop and implement an investment policy statement. (IPS)
An Investment policy statement (IPS) is a document that defines the purpose, roles and responsibilities, investment structure philosophy and plan objectives. It describes the strategies that will be used to meet these objectives and contains specific information on subjects such as asset allocation, risk tolerance, and liquidity requirements. A well constructed IPS can provide the plan’s investment committee with a roadmap for making reasonable decisions on behalf of plan participants and their beneficiaries.
The best approach to develop and maintain an IPS is to keep it simple. Sections should be concise and to the point. Plain language should be used, along with clear metrics. Processes should be easy to follow. The most common mistakes made in developing an IPS are being too detailed and over-committing. For example, you don’t want to declare that all investments should be ranked in the top 50% or better of their peer universe. Should a fund perform worse than that in any given time measurement period, then you have painted yourself into a corner and technically, you are out of compliance with your IPS. The IPS should be one of your first lines of defense. Too much detail in your IPS could prove to be self- incriminating.
The investment policy statement has been in existence since 1974, the same year the Employee Retirement Income Security Act (ERISA) was introduced and is an important component of plan management with respect to investment menu selection and monitoring. It is also routinely requested by the auditors or the DOL when auditing a plan, making it a critical piece of documentation to support the retirement plan’s investment management methodology and practices.
In summary, the IPS should be viewed as a guide that helps your committee stay the course path when making investment decisions as well as avoid pitfalls along the way. It can help the committee avoid being reactionary or emotion-driven during stressful market events. And it can instill a sense of sound fiduciary process. However, the IPS should also be a living document that evolves as the plan evolves It should not be filed away and left to collect dust.
Establish and implement Retirement Plan Committee Charter
While many employers that sponsor a retirement plan have a retirement committee in place, we strongly encourage our clients to formally establish a Retirement Plan Committee Charter. The establishment of a committee can be formalized by adopting a Retirement Plan Committee Charter. This Committee Charter helps to protect the named fiduciary, typically the Board of Directors or entity, by delegating certain identified fiduciary responsibilities to the Committee. Furthermore, it protects the Committee members by defining the specific duties for which they are responsible. Additionally, it protects the plan participants as it provides for orderly and prudent governance of the plan designed for the exclusive best interests of the participants and their beneficiaries, as required by ERISA Section 404(a).
We can assist the process of adopting a Committee Charter by providing a sample Committee Charter document and helping select the appropriate provisions. Consider the following discussion points:
- Determine the purpose of the Committee (investment related, administrative issues, or both).
- Determine how Committee members are selected (who should/should not be members).
- Is there an ideal number of Committee members?
- What topics should the Committee cover?
Market volatility and plan fees combined with our litigious society is generating concern on the part of many fiduciaries regarding their potential exposure. Taking a casual approach to plan governance, without a formalized Committee Charter, will not help insulate the company or the plan fiduciaries from participants’ complaints or lawsuits.
Develop and implement an Education Policy Statement (EPS)
It goes without saying, participant education is critically important. This is where the rubber meets the road. The best designed retirement plan, with great funds and competitive fees mean very little if employees don’t participate in the benefit you are providing them. Employee education is often where many plan providers fall short. Plan providers are adverse to conducting face to face education meetings. Why? Because It is time consuming and costly. In fact, due to this, many record keepers and administration firms either charge fees up to $1,500 per day for F2F education. Often, they try to reduce expense by providing education virtually or just directing the participants to log on their website and take it from there.
It is our opinion that there is nothing more impactful and results driven than that of a high quality F2F education meeting that inspires your employees to save. If they are already saving, then the goal should be to inspire them to save more! This is where your Education Policy Statement (EPS) comes into play.
The education policy statement is a recent addition to the fiduciary management toolbox. It was created by forward-thinking retirement plan practitioners as a way to translate the utility of the investment policy statement to other areas of plan governance.
An education policy statement is not required, but it is a natural extension of the investment policy statement and can effectively serve a similar function. It may also be a prudent next step for plan sponsors in response to increasing scrutiny of plan fiduciary activities and the potential for increased participant litigation. Sponsors working with a comprehensive education policy statement will benefit from the unified vision that defines exactly what education means to their retirement plan and how it will be delivered.
Quarterly due diligence meetings with investment committee
Whether you prefer to meet once a year or every quarter, documenting the investment performance relative to benchmarks is important as it shows action. The IPS governs that you do so. Even if you elect to not meet quarterly, Kaizen Retirement Plan Advisors will prepare a quarterly review of all of the investments based on absolute, relative and risk-adjusted returns. Documentation of your activities is critical. It’s not enough to say it. You must document it.
Record committee meeting minutes for prudent documentation and save electronically