Being a fiduciary is not easy, and many retirement plan stakeholders don’t even realize they are fiduciaries. That opens the door for numerous mistakes that could end up costing the plan and the employer a lot of money.
“A lot of plans focus on the best investments and best procedures and not the reason fiduciaries are there, [which is] to act in the best interest of participants and their beneficiaries,” says Mike Webb, vice president at Cammack Retirement Group and an expert in fiduciary compliance matters.
Webb identifies the following 10 common errors that retirement plan fiduciaries make.
1. Failure to identify all fiduciaries. Most organizations have numerous plan fiduciaries, but many of those individuals don’t know they are fiduciaries until they get called to testify in court cases regarding their fiduciary conduct, Webb says. The plan trustee, investment adviser, individuals exercising discretion in the administration of the plan, members of a plan’s administrative committee and those who select committee officials are all plan fiduciaries.
2. Failure to provide proper fiduciary liability insurance. Employers must purchase liability insurance for plan fiduciaries. Many plan sponsors believe that retirement plan fiduciaries are covered by some sort of insurance, such as directors’ and officers’ liability insurance or employment practice liability policies, says Webb. This may not be the case. Fiduciary liability is personal and not corporate. If a fiduciary is not properly insured, their own personal assets could be used to settle claims.
3. Failure to understand the types of third-party fiduciaries. There are only three types of fiduciaries under the Employee Retirement Income Security Act: 3(21) fiduciaries provide advice but don’t have discretion over plan assets; 3(38) fiduciaries are investment managers who have discretion over plan assets and are decision makers; and 3(16) administrators have complete responsibility for all administrative functions of the plan, including selection of service providers and investment management, Webb says.
4. Fiduciaries aren’t trained properly.
5. Failure to take appropriate actions and document such actions. Minutes must be taken at meetings where decisions about the plan are being made. If this isn’t done, it paves the way for litigation, he says.
6. Spending too much time on plan investments. Most committees are hyper-focused on the types of investments included in a company-sponsored retirement plan. But other topics of critical importance, such as remitting plan contributions on time, following the plan document and monitoring/controlling plan expenses, also need to be discussed, he says.
7. Spending too much time on the wrong investments. Plan decision makers often spend a lot of time debating mutual funds and variable annuities included in their plans but give short shrift to stable-value and target-date funds, which often garner the most plan assets.
8. Failure to follow the plan’s investment policy statement.
9. Failure to properly benchmark plan expenses. Companies need to do a cost analysis fairly frequently because fees continue to drop, says Webb. “If those fees are going down and you haven’t benchmarked in two years, you are missing out. That needs to be a process. Plan sponsors need to keep on top of it,” he says.
10. Spending too little time on participant outcomes. The best way to improve participant outcomes is to work with third parties, such as the plan vendor and adviser, to come up with a handful of achievable strategies to increase plan participant savings, says Webb. Use former employees who successfully retired from the plan as advocates to get other employees to save within the company retirement plan, he says. Use incentives to get people to meetings that talk about retirement. “Food is a good motivator,” Webb says. “Offer a free lunch and then tell them they can’t leave until they get on the computer or fill out a form and elect to save more or up their current percentage.”
He also recommends that employers create a retirement message board on the company intranet. “If you don’t make it fun you are going to lose them [employees],” he says.