When creating and maintaining your company’s retirement plan, you’ll want to do so in a way that creates the best outcomes for plan participants while reducing risk. To help you achieve those goals, we’ve outlined eight strategies that you can start following today.
1. Establish a retirement plan committee
A retirement plan committee can reduce your fiduciary risk by providing a formal, central framework for making plan decisions. A committee also brings a diverse set of skills and experience, which may lead to better decisions for the plan. Members should be carefully selected and must be capable of performing the necessary duties. Common committee member roles include finance, human resources, and legal—though the size and structure of your organization may benefit from a different committee make-up.
2. Maintain a prudent process for selecting investments, and document the process
In the event of an audit or inquiry, you’ll need to prove that your organization followed a prudent process for selecting and monitoring investment options. Do this by documenting as much as possible. If you have an investment committee, examples of documentation might include the charter statement, meeting minutes and/or notes, as well as other relevant materials, such as an investment policy statement. Note, your prudent process should also include a review of the reasonableness of fees and expenses related to the investment options and services provided.
3. Create and follow an investment policy statement
An investment policy statement addresses the prudent process for selecting and monitoring investments—a useful resource for plan fiduciaries. A comprehensive investment policy statement is even better, as it can significantly reduce fiduciary risk. Keep in mind, however, once an investment policy statement is in place, it must be followed by fiduciaries and investment committees. Failure to do so could be viewed as a fiduciary breach.
4. Understand the ERISA Section 404(c) protection
If you allow participants to select their own investments within your organization’s defined contribution plan, ERISA Section 404(c) protects fiduciaries from being held responsible for poor results due to investment decisions made by participants. But you must be compliant with ERISA Section 404(c) in order to be eligible for its protection. A word of caution: even with that protection, plan fiduciaries are still responsible for selecting and monitoring the plan’s investment options.
5. Don’t forget about QDIA protection
Similarly, a qualified default investment alternative (QDIA) protects plan fiduciaries from liability due to participants’ investment losses—as long as the QDIA requirements are met. The regulation is applicable to situations when participants don’t provide investment direction (e.g. automatic enrollment) or when an investment option is removed.
6. Understand responsibilities and use governing documents
Good governance processes and procedures help reduce the likelihood of a plan straying off course. The governing documents provide the guiderails for operating the plan. Everyone handling the retirement plan is responsible for understanding the governing documents and ensuring the terms are followed. When a retirement plan doesn’t operate according to its governing documents, it’s commonly viewed as an operational error or fiduciary breach. Examples of key governing documents include:
- Plan document
- Trust instrument
- Charter statements
7. Make sure your plan design supports good governance
An effective plan design that supports governance is one that is both in compliance with the law and positions the plan participants for financial retirement success—while also reducing administrative complexity that leads to costly errors. Examples of plan design options include:
- Using automatic plan features
- Offering simplified requirements for defining which employees are eligible to enroll
- Limiting participants’ access to plan loans
- Providing retirement income options
8. Have the right risk shifting strategies in place
Risk shifting strategies are critical to protecting the participants, fiduciaries and the assets of the retirement plan. While ERISA requires that retirement plans maintain a fidelity bond, you can also explore some optional risk-shifting strategies as well, such as fiduciary liability insurance, indemnification of plan fiduciaries and cyber security insurance, to name a few.
Proactive management and governance of your retirement plan is not a nice-to-have; it’s essential. When you do your due diligence with your retirement plan, you help set your employees up for financial success in retirement while reducing risk in the process. Schedule a consultation to learn more about company retirement plans.
Key Client Fiduciary Advisors, LLC (“KCFA”) is an SEC-registered investment adviser located in Fairfield, New Jersey. This blog post is limited to the dissemination of general information pertaining to KCFA’s investment advisory services. The information in this blog post should not be construed as personalized individual advice. A copy of our KCFA’s written disclosure statement as set forth on Form ADV, discussing KCFA’s business operations, services and fees is available upon written request.