This article was written by Samuel P. Zadrozny, CPA, Manager
The Department of Labor (DOL) in recent years has made fiduciary oversight a point of emphasis in their respective audits. According to the U.S. Department of Labor website, “the primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses.” The website also goes on to state, “fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets.”
The market downturn we are experiencing highlights the importance of fiduciary oversight. For the plan year 2022, the results will look a lot different and create more risk for plan administrators than in recent years. For the plan year ended December 31, 2021, the market performance was strong with the Dow Jones Industrial Average (DJIA) being up 18.65%. However, with the current, ever-changing market the DJIA year-to-date (as of October 19, 2022) is at a 16.17% deficit. Based on this, we would expect plan investments have decreased significantly. For the U.S. economy, the DJIA is the financial media’s most referenced U.S. market index and indicator of general market trends. Plan management discuss these trends and implement a policy to document their regular meetings and any important decisions or discussions held during the meeting.
As a direct result of market deficits, plan administrators may hear of employee angst that can result in finger pointing toward the employer. If an employer becomes aware of plan participants concerns, it is important not to ignore them. A disgruntled participant could turn to the DOL and hire an attorney to work on their behalf. Participants should be able to ask questions about the plan and have the ability to reach out to someone or access online resources surrounding the plan they are participating in. Here are some topics to consider as part of fiduciary duties that can assist with remediation:
- Even though it is employee money, the employer can exercise and enhance their fiduciary duties – Employers have an obligation to plan participants which is to help them maximize their return. It’s important for employers to keep a constant perspective of “am I utilizing funds that are in the sole interest of the participants?”
- Perform internal audit of employee investment elections and compare to market – A comparison can be made on how a participant’s elected investment has performed vs. market performance. If an employer is finding that a participant election is not performing well in comparison to the market performance of a particular investment, plan management should investigate and discuss with their service organization.
- Review custodian SOC report for controls around participant elections – A significant amount of plan transactions processing is performed by service organizations that our clients place a heavy amount of reliance on. Plan management needs to review the procedures at these service organizations especially as they relate to participant elections and understand the complementary user controls. These controls are complementary to the controls of the service organization and are necessary for the service organizations’ controls to be achieved.
- Review existing investment portfolio and performance on a quarterly basis and document in detailed minutes – Plan management should assess the existing investment strategy of their employee benefit plan on a regular basis considering asset allocation, asset class diversification, investment fees etc.
The bullet points above are not meant to be all inclusive but serve as a guideline of topics that would be beneficial to discuss as part of the fiduciary oversight process.
If you need further guidance or have any questions on this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.