How retirement plan sponsors can reduce risk.
It is well known that plan sponsors (employers) have a fiduciary duty to their participants and with that duty comes risk. They can face uncomfortable audits from the Department of Labor and/or IRS, expensive lawsuits, and erode the trust of their employees when their retirement plans are poorly managed.
Plan sponsors can work to mitigate these risks, first by understanding the role of each party/vendor involved, and second, by clearly outlining those responsibilities in plan documents. Understanding and defining these roles will help to ensure the plan is operating properly and the appropriate procedures and processes are in place.
The roles of the parties involved in a retirement plan, outlined below, provide a system of checks and balances by involving experts responsible for their individual areas. Alesco Advisors recommends defining each role to help provide interdisciplinary oversight over the collective plan roles and areas--while increasing transparency of costs and duties.
A plan sponsor is typically an employer that establishes a retirement savings plan for the benefit of its workforce. The sponsor shoulders the responsibility and risk of the plan, whether they are an investment expert or not.
RETIREMENT PLAN COMMITTEE
The plan sponsor should establish a retirement plan committee, which can involve senior leaders including its chief financial officer or head of human resources as well as legal counsel, outside business people, and even a plan participant. This committee should meet on a consistent basis to ensure the plan is operating appropriately.
INVESTMENT ADVISOR or INVESTMENT MANAGER
A retirement savings plan without an investment advisor or investment manager leaves the plan sponsor exposed to unnecessary fiduciary risk. Some believe the cost is unnecessary, but if an issue arises in the absence of an advisor or manager, the responsibility falls back to the plan sponsor.
While the terms “investment advisor” or “investment manager” are often used interchangeably, there are very specific distinctions between them that plan sponsors should understand.First, the 3(21) “investment advisor” provides recommendations on how to manage the selection of the various investment choices within a retirement savings plan and takes on a co-fiduciary role with the plan sponsor.However, the plan sponsor ultimately retains discretion over the plan’s investment options.
Meanwhile, a 3(38) “investment manager” transfers as much investment risk as possible away from the plan sponsor, as it has full discretion over the available investment options within the retirement savings plan. They largely insulate the plan sponsor from risk associated with a plan’s investment decisions and are better suited for this role since they are an investment expert. Despite this level of protection, the plan sponsor still maintains a fiduciary responsibility to monitor the 3(38) investment manager. Alesco recommends the advisor or manager put its fiduciary status in writing to ensure there is no confusion relating to the assumption of investment related fiduciary responsibility.
Some advisors do not fulfill either the 3(21) or 3(38) role, providing the plan sponsor with little fiduciary protection.
This role handles the day-to-day decisions of the plan. The administrator will assist with plan documents (Adoption Agreement, Summary Plan Description, Fee Disclosures, etc.).They may make decisions on loans, withdrawals, distributions, as well as help with overall plan design. An administrator’s work often goes unappreciated, but is invaluable in ensuring that the plan is operating in Compliance with the governing plan documents.
The recordkeeper often works with the plan’s administrator by handling day-to-day transactions, website maintenance, the tracking of individual accounts, and allocating the appropriate fees to those accounts. They typically prepare the plan’s annual Form 5500, complete annual nondiscrimination testing, and issue Required Minimum Distributions, if applicable.
Working together, these roles provide a system of checks and balances that help ensure the proper management of nearly any retirement savings plan while removing a large amount of legal exposure and risk to plan sponsors.