Many retirement plan sponsors don't realize they are plan fiduciaries. Still others don't understand what it means to be a fiduciary or are ill-prepared to act prudently in that capacity.
Unfortunately, what plan sponsors don't know can hurt them in ways that are quite often unintended. Regulations have become more difficult to understand and comply with, and plan sponsors are seeking knowledgeable professionals to help them.
Financial advisers have the opportunity to play a valuable role by pointing out fiduciary duties to existing and potential clients.
The role of plan sponsors has taken on heightened importance because the entire fiduciary landscape is changing.
It is becoming more difficult for them not only to keep up with regulatory changes, such as the Pension Protection Act of 2006 and changes to Form 5500, but more importantly, to grasp the impact these regulations have on their ability to carry out their fiduciary responsibilities.
In this era of significant regulatory change, advisers have an excellent opportunity to educate sponsors, which is the first step in the process of protecting them from fiduciary liabilities.
The stakes are high. Severe consequences, including fines, lawsuits and plan disqualifications, face plan sponsors who fail to perform their fiduciary obligations.
Individuals in plan sponsor administrative roles also may be held personally liable.
Because all plan sponsors need to understand the issues that they face, and will benefit from the insights you can provide, it is prudent to make the discussion about fiduciary responsibilities a part of any “sale” to a plan and to bring fiduciary issues to the attention of prospective as well as established clients. If you neglect to have this conversation with your clients, others may step in.
To help plan sponsors navigate the changing fiduciary landscape, you should first clear up any confusion over the role and legal responsibilities of those acting as fiduciaries.
The Employee Retirement Income Security Act of 1974 defines the attributes of a fiduciary. This definition can apply not only to plan sponsors but to investment managers, consultants and trustees as well.
The key fiduciary duties of plan sponsors include prudently selecting and monitoring service providers and plan investments, as well as providing participant education and disclosure.
Plan sponsors should be made aware that it isn't enough simply to act in a prudent manner. They must also hold themselves accountable to being informed at all times, and use new and existing knowledge to act in the best interests of participants and their beneficiaries.
Sponsors should follow a disciplined process with a deliberate methodology covering due diligence, implementation, documentation and review. They should be able to document and demonstrate their entire decision-making process to show they are acting and behaving as prudent experts, and that their plans are being operated in the best interests of participants and beneficiaries.
Advisers can help plan sponsors prepare for the new fiduciary landscape and improve their fiduciary process by asking them these key questions:
• Do you have — and follow — a written investment policy statement?
• Have you had a service provider and investment review in the past 12 months?
• Do you have committee meetings, and do you document meeting minutes?
• Do you offer a broad range of investment options, including a qualified default investment alternative, and was the plan's QDIA option selected based on prudent criteria?
• Have you provided participants with certain required information as well as a list of optional information that they can obtain upon request?
By demonstrating the value you add, you can develop more-consultative partnerships in your existing plan sponsor relationships and build new relationships with better- informed and well-prepared plan sponsors.
Joseph Lee is head of U.S. adviser defined-contribution sales for BlackRock Inc.
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