Time for a Fiduciary Health Checkup

This article was written and produced by Jeffrey S. Coons, PH.D., CFA, Chief Risk Officer, and Director of Institutional Services, High Probability Advisors. Looking to get in touch with Jeffrey? Reach out today: jcoons@highprobabilityadvisors.com.

When was the last time you had a checkup? Not a checkup of your physical health, but of your fiduciary health? After all, if your 501(c)(3) tax-exempt organization offers a 403(b) or 401(k) plan, then it is likely that the plan is subject to the Employee Retirement Income Security Act (ERISA). In that case, you and your organization have clear and uncompromising fiduciary responsibilities to the retirement plan and its participants. Just as we have our annual physical exams to catch and correct health problems early, a review of our fiduciary health can alert to areas of your retirement plan that should be improved before damage is done to your participants and your organization.

Due diligence

What aspects of the 403(b) or 401(k) plan should you review to check your fiduciary health? The one part of your fiduciary responsibility to the retirement plan that you cannot avoid is the need to perform due diligence on the plan’s vendors and advisors. This is not just a one-time activity when you hire a new advisor, but rather should be a routine part of the work that your organization does to support the plan. There are two steps that you can take today to address your responsibility to perform due diligence on the plan’s providers:

• Fee Due Diligence
• Vendor Services Due Diligence

The need to perform Fee Due Diligence is the most consistent message provided by the courts in the myriad of ERISA lawsuits that have been decided or settled over the past several years, so it is the most practical step you can take to improve your fiduciary health. Even if you performed a competitive due diligence process several years ago when you hired your advisor, record keeper and/or third-party administrator, it is important that you re-review the fees your plan is paying to make sure they are reasonable in light of your plan’s characteristics (e.g., total assets, number of participants, etc.) and the services those vendors are providing today. The last part of the previous sentence is important; your responsibility is to ensure the reasonableness of fees given services provided, not to have the lowest possible fees regardless of service. We have all been consumers long enough to know the difference between “cheap” and “competitively-priced given the value.” Further, just as we do not want to be overcharged by any professional (from doctors to retirement advisors), we know that we should not make our decisions based solely on price. A well-done fee due diligence review can help you understand what your plan is being charged relative to similar-sized plans and similar service levels, thereby allowing you to document your due diligence as a fiduciary to the plan.

Since a well-done fee due diligence review involves understanding the services being provided by your plan’s advisors and providers, another important step in a fiduciary checkup is to perform Vendor Services Due Diligence. It’s important to know what duties your advisors and providers are taking on, including whether they are accepting fiduciary responsibility for those activities. In particular, if your retirement plan advisor is making investment decisions on behalf of your organization but not accepting fiduciary responsibility for those decisions in writing, then you may well be on the hook for their process, criteria, and decisions. A review of the contracts your organization has with its vendors can help identify whether your relationship with them serves to raise or reduce your fiduciary responsibilities and risks.

The Investment Policy Statement

Beyond the two due diligence steps, a fiduciary checkup should include making sure you have documentation of what your organization’s intentions are for the plan and expectations are from vendors. This documentation is known as an Investment Policy Statement and it can be an important tool for maintaining your plan’s fiduciary health. The first question to answer is: do you have an Investment Policy Statement for your plan? If the answer is no, then it is worthwhile to investigate why not. All too often, the answer to “why not?” is the plan’s retirement plan advisor never thought to offer to draft it for the plan.

If your plan has an Investment Policy Statement, then read through it. Does it have all of the elements that you would expect (i.e., the organization’s objectives for the plan, its intention to comply with 404(c), roles of providers and assignment of fiduciary responsibilities, policies around vendor and investment selection/monitoring, etc.)? Has the document avoided overly-detailed procedures by staying focused on general statements of policies, objectives, and intentions? Remember, the Investment Policy Statement is an important document expressing your commitments to the plan and its participants, so a well-formed Investment Policy Statement avoids making promises unless you know they should and will be kept. Finally, your Investment Policy Statement Review should make sure that the policies and responsibilities outlined in the document are in fact being executed upon by your organization and its advisors and providers today.

We can help

As with your physical health, making sure you have protected your fiduciary health can seem like a daunting task. If you do not feel confident that your fiduciary responsibilities to your organization’s ERISA 403(b) or 401(k) plan have been met, then please do not hesitate to reach out to High Probability Advisors and its partner, The Bonadio Group. We can assist you in reviewing your plan vendors’ fees and services, as well as assist you with advice on the Investment Policy Statement and other aspects of your plan. When it comes to fiduciary risks, an ounce of prevention today is truly worthwhile to avoid the pounds you may have to pour into solving a problem in the future.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.