Do defined contribution plan sponsors understand the full scope of their fiduciary responsibilities? A January 2010 survey report titled Inside the Minds of Plan Sponsors suggests they don't.
Drawing on a survey of more than 1,000 U.S. defined contribution plan sponsors by investment management firm AllianceBernstein, the analysis found that while plan sponsors have the desire to help employees achieve a comfortable retirement, the lack of understanding about their fiduciary responsibilities was troubling.
Responses were considered from respondents who indicated they had primary responsibility for the retirement plan, served on the plan's investment committee or served on the plan's administrative committee. But when asked if they considered themselves to be plan fiduciaries, 37 percent said no—clearly the wrong answer.
It's not that plan sponsors are unaware of the problem: Across all plan sizes, only 55 percent were comfortable or very comfortable that all relevant individuals at their organization were aware of their fiduciary status.
A follow-up question revealed that 56 percent of plan sponsors from micro-size plans (less than $1 million in assets) and 59 percent from small plans (between $1 million and $10 million in assets) were confident or very confident that their plan fiduciaries understood core standards of conduct, compared with 75 percent of plan sponsors from mega-size plans (more than $250 million in assets).
"It's not surprising to see a significant disparity between plan sponsors from larger plans and those from smaller plans in terms of their understanding of fiduciary issues, as responsible executives at large companies usually have more focused roles and additional resources," says Richard A. Davies, head of product strategy for AllianceBernstein Defined Contribution Investments (ABDC). "This research demonstrates that there is a real opportunity for financial advisors and consultants to help the smaller plan sponsors who have limited time and resources to spend on their plans."
Sailing Past the QDIA Safe Harbor
One of the most important decisions plan sponsors must make is selecting a qualified default investment option (QDIA), which provides them with fiduciary safe harbor protection when investing on behalf of participants who fail to choose their own investments. The survey revealed that in 2009 only 38 percent of micro/small plan sponsors were using a QDIA, such as a target-date or risk-based fund. In contrast, 56 percent of mega plans were using a QDIA. "While there is certainly room for more mega plans to adopt default options that are QDIA-compliant, these findings highlight the implications for smaller plans whose sponsors may not grasp the benefits—to them or their participants—of implementing a QDIA," according to the report.
Target-date funds, one of the three types of QDIAs specified by the U.S. Department of Labor, have become the most popular choice for a QDIA due to their diversification and ease of use. "Of the plans that do not currently offer target-date funds, only 44 percent of smaller plans intend to add them in the future, while 67 percent of mega plans will do so. “This reflects the lack of familiarity with target-date funds and QDIA rules among many smaller plan sponsors—which clearly indicates that they need help," says Cathy Peterson, senior marketing director at ABDC.
Plan sponsors' single biggest worry is that participants will not accumulate enough to retire. Across all plan sizes, they want to help employees not just to retirement but through retirement by:
• Helping employees to make better investment decisions (86 percent).
• Generating a retirement income stream (85 percent).
A large majority of plan sponsors (72 percent micro/small and 83 percent mega) felt that reviewing fiduciary responsibilities was an important service to receive from their provider, demonstrating their concern about fiduciary issues.
"Plan sponsors of all sizes are looking to their service providers for more help with fiduciary-related services—probably in response to the global recession and the heighted governmental scrutiny of defined contribution plans," according to the report.
As compared to the last time this survey was conducted in 2005, plan sponsors wanted more help with:
• Ongoing monitoring and reviews of investment options (89 percent in 2009 vs. 46 percent in 2005).
• Plan design or compliance updates (79 percent vs. 30 percent).
• Reviewing fiduciary responsibilities (78 percent vs. 24 percent).
Core Standards of Conduct for Fiduciaries
The Employee Retirement Income Security Act (ERISA) defined a fiduciary as someone who has discretionary authority or control over a retirement plan, whether with regard to the plan's administration or assets. According to the U.S. Department of Labor, people take on fiduciary status based on the functions they perform for the plan—not the title they hold. If they exercise discretionary authority or control over the plan, they are fiduciaries.
Some key fiduciary responsibilities are:
• To act solely in the interest of plan participants and beneficiaries, with the single purpose of providing benefits to them.
• To pay only necessary and reasonable expenses for administering the plan.
• To perform their duties with the care, skill, prudence and diligence of a person knowledgeable in this field.
• To minimize the risk of large investment losses by offering a diversified menu of investment options.
• To adhere to the terms of the documents governing the plan and ensure that these documents comply with ERISA.
• To satisfy all reporting and testing requirements.
• To not engage in self-dealing and avoid conflicts of interest.
To improve the fiduciary process:
• Identify all plan fiduciaries—whether they are named in plan documents or are "functional fiduciaries."
• Establish procedures—create a paper trail to demonstrate compliance with ERISA rules.
• Consider adopting an Investment Policy Statement—this provides fiduciaries with guidelines or general instructions concerning types of investments and investment management decisions.
• Conduct annual reviews—this helps the plan and its fiduciaries stay current and in compliance.
Source: AllianceBernstein, Inside the Minds of Plan Sponsors.
Stephen Miller is an online editor/manager for SHRM.
Precautionary Steps to Avoid 401(k) Mismanagement Lawsuits, SHRM Online Benefits Discipline, March 2008
Developing a 401(k) Investment Policy Statement, SHRM Online Benefits Discipline, January 2008
How to Conduct a Retirement Plan Assessment, SHRM Online Benefits Discipline, January 2008
Clearing the Annual 401(k) Compliance Test Hurdle, SHRM Online Benefits Discipline, March 2007
Fidicuiary Fitness, HR Magazine, September 2003
SHRM Online Benefits Discipline