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Employer Resource Site
Focusing on making your retirement plan better and your job managing it a whole lot easier
The Path to a Better Retirement Plan
Welcome to our Employer Resource site. This site is maintained by Etzler Financial Advisors, LLC as an extension of our services to help employer clients make more informed decisions about their retirement plans. Our role as a fiduciary advisor is to help you save time, reduce fiduciary risk, and deliver the benefits intended for your employees. We serve as an ERISA fiduciary to your plan, allowing you to delegate certain responsibilities to us - helping to ensure excellence in plan management through an independent, objective governance and monitoring process and to uphold your obligations through a documented oversight process.
What your plan assessments should include
The environment for retirement plans has changed significantly in recent years and continues to evolve. Plan sponsors must ensure they act exclusively in the interest of the plan participants and manage the plan with prudence.
As a plan sponsor, you should adopt an systematic plan management process that begins by conducting a fiduciary and operational assessment of your plan to determine and document its current state. By focusing on your plan’s investments, administration, compliance and communications, you will be able to determine where any weaknesses lie and take steps to correct them. Ongoing assessment should include a review of your plan's:
The importance of benchmarking your plan
Benchmarking is an important part of the due diligence process towards optimal plan structure. Many industry experts recommend that you benchmark your retirement plan every three years to ensure that the fees you and your participants pay are reasonable and commensurate with the services received.
Section 404(a) of ERISA provides that fiduciaries must elicit information necessary to assess not only the reasonableness of the fees to be paid for services, but also the qualifications of the service providers and the quality of the services that will be provided. But benchmarking is not just about fiduciary protection. Fees and plan design features have a huge impact on retirement savings for your participants, contributing not only to the success or failure of their retirement readiness, but also to the value of your company’s retirement plan as an employee recruitment and retention tool.
The most common way to benchmark your plan is to seek a benchmarking report from an independent advisory firm that uses an independent benchmarking company such as Fiduciary Benchmarks, Inc., BrightScope, Plan Tools, or Advisor Labs Retirement Plan Diagnostic. Each of these companies can produce a diagnostic report, which can be very useful in evaluating plans and negotiating with service providers.
You may also consider issuing a request for proposal (RFP). Conducting an RFP can result in a thorough review of plan(s) and service providers. However, this can be an expensive and time-consuming process.
To maximize the benefits of benchmarking your plan, it’s important to consider the following:
Regular benchmarking of retirement plan costs and performance can go a long way to provide a better experience for your plan and participants.
How to select and monitor your service providers
The hiring of a service provider for the retirement plan is and of itself, a fiduciary function. A plan sponsor may be held liable for failure to use a prudent process in evaluating, hiring, and monitoring their service providers.
Regardless of plan size, ERISA requires that a plan sponsor has sufficient information to make informed decisions about the services, costs, and qualifications of each service provider to the plan. As a result, it is critical that you perform proper due diligence when you hire and monitor your service providers..
Why it's important to monitor plan fees and expenses
Determining the reasonableness of fees is an explicit fiduciary obligation for plan sponsors under ERISA. The plan sponsor must ensure that fees are and continue to be reasonable in light of the services rendered.
There is no requirement that plan costs must be the lowest possible. However, as a plan sponsor, it’s important for you to understand, and document, how much is being paid, the parties being paid and the services being provided. You should also identify and eliminate potential conflicts of interest among service providers and other parties that influence plan decisions.
The importance of identifying your plan fiduciaries
For purposes of ERISA, a fiduciary is generally anyone with discretionary authority or control over the management of a plan, administration of a plan, or disposition of a plan’s assets. Thus, many actions involved in operating a plan make the person or entity performing them a fiduciary, to the extent discretion is used. Fiduciary status is based on the functions performed for the plan, not just a person’s title. In most cases, authority to administer the plan and select its investments falls on either the company sponsoring the plan (plan sponsor) or the plan committee. Therefore, the company and/or the committee are usually fiduciaries under ERISA. This is the case even if a third-party actually administers the plan. Most third-party administrators limit their activities to ministerial duties performed at the discretion of the plan sponsor or plan committee, to avoid becoming fiduciaries to the plan.
Every plan must have at least one “named fiduciary.” The named fiduciary can appoint other fiduciaries. Anyone who makes such appointments has a duty to prudently select those persons and to periodically review their work to make sure they are fulfilling their responsibilities. Fiduciary appointments might include the plan’s trustees and investment advisor and any committees that have discretionary authority to manage the plan or its assets. If a plan committee is appointed, the individual committee members are fiduciaries and must perform their duties under ERISA fiduciary standards.
The duties of plan sponsors and their fiduciaries are numerous and complex. It is nearly impossible for employers to be aware of all relevant rules, and plan sponsors usually need assistance to ensure compliance. Yet failure to comply with ERISA rules can result in penalties, government audits and even personal liability.
The duties of a retirement plan fiduciary
ERISA defines the general fiduciary standards that apply to all fiduciary actions. Fiduciaries are subject to the following basic standards of conduct and responsibilities:
If any such duty is breached, a fiduciary may be held personally liable for, among other things, any plan losses resulting from the breach. Corporate protection over individual liability and personal assets does not apply when an individual breaches a fiduciary duty, whether or not that person knows he or she is a fiduciary.
Thus, it is essential that fiduciaries know the basic rules governing retirement plans and understand what is required to comply with them. Fortunately, fiduciaries can seek guidance and support from retirement plan professionals who have extensive experience in this area.
Why fiduciary status matters
ERISA mandates what is described as the “prudent expert standard,” which states that a fiduciary must “manage a portfolio with the care, skill, prudence and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” When a plan sponsor partners with a financial services provider to help meet this standard, they should carefully evaluate whether the provider is recognized as an ERISA 3(21) or an ERISA 3(38) fiduciary.
Investment Advisor – ERISA 3(21) Fiduciary – According to ERISA section 3(21), an investment advisor to a qualified retirement plan does not have discretion over plan assets directly, but may exercise a certain level of influence and must meet a fiduciary standard-of-care. Investment advisors give investment advice and recommendations to plan sponsors who may choose to accept or reject it. The plan sponsor retains the responsibility to appoint and monitor the investment advisor and ultimately makes the investment decisions.
Investment Manager – ERISA 3(38) Fiduciary – According to ERISA section 3(38), an investment manager to a qualified retirement plan has discretionary control to hire and fire other investment service providers relevant to its scope of responsibility. For example, the 3(38) fiduciary will monitor and replace investment managers as it deems necessary and appropriate in its sole discretion. The plan sponsor retains the responsibility to appoint and monitor the 3(38) fiduciary, but does not ultimately make the investment decisions.
A 3(38) fiduciary can only be (a) a bank, (b) an insurance company, or (c) a registered investment adviser (RIA) subject to the Investment Advisers Act of 1940 and assumes legal responsibility and liability for the decisions it makes, which enables the plan sponsor to better manage and mitigate their fiduciary risk.
Most financial service providers (i.e. brokers, consultants and advisors) are not willing or legally able to serve as ‘fiduciaries’ to retirement plans and thereby do not alleviate fiduciary liability for plan sponsors. Retirement plan fiduciaries should be fully aware of what, if any, fiduciary role service providers are performing. Unfortunately, cleverly positioned marketing materials and campaigns may lead plan sponsors to believe another party is assuming fiduciary risk, when in fact, they are not.
It is important to note that a plan sponsor cannot completely eliminate its fiduciary liability. The plan sponsor is still responsible for the careful selection and ongoing monitoring of the plan’s service providers.
The importance of having an investment policy
The selection, monitoring and maintenance of the plan investment menu are the duties most frequently identified with being an ERISA fiduciary. It is well established that courts apply a “prudent expert” standard of care under ERISA, not a “prudent person” standard. The relevant standard is NOT what you might do in investing your own money; it’s what an expert would do in investing someone else’s money.
If an investment decision is challenged, either by a U.S. Department of Labor investigation or by a civil lawsuit, your plan fiduciaries must be able to produce documentation that they engaged in a prudent investment decision-making process. This documentation should include the following:
An investment policy statement (IPS) provides the framework for a prudent process. The IPS defines the roles and responsibilities of the plan sponsor and its fiduciaries, outlines specific guidelines and restrictions, and provides for the periodic review of the investments and policies. The IPS defines the criteria for the evaluation, selection, ongoing monitoring, removal and replacement of funds.
Although ERISA does not require a retirement plan to adopt an Investment Policy Statement (IPS), best practices dictate adoption of a written IPS that provides a clear “roadmap” for policy direction and procedural guidelines that will allow the plan fiduciary to select and monitor investment options and service providers under the plan, comply with the standards imposed by ERISA, and meet the plan’s overall objectives. After all, if procedures are not formalized in writing, how can a fiduciary demonstrate the performance of a prudent process?
Ongoing monitoring of your plan investments matters
In addition to selecting investment funds offered under the plan, fiduciaries must also monitor the performance of these funds and replace those that are no longer prudent. Plan sponsors or their fiduciaries who select investments for the retirement plan must answer questions such as:
Many retirement plans allow participants to direct the investment of their own account. Shifting the obligation for investment selection to employees does not change the legal responsibility for the plan sponsor. Even in a participant-directed plan where employees choose their own investments, the plan sponsor has the ultimate legal responsibility for the investments. The plan sponsor may receive the “safe harbor” protection offered by ERISA 404(c) only when the investment options offered to employees are suitable and prudent for the plan and remain so on an ongoing basis. However, the plan sponsor has a continuing duty to select, monitor, and remove imprudent investments from the plan.
Unless the plan has contracted with an ERISA 3(38) investment manager (discussed above), the plan sponsor has a continuing duty to monitor plan investments. This duty is separate and distinct from the duty to exercise prudence in selecting plan investments at the outset. Continuous investment monitoring and quarterly reporting should be the standard. The plan sponsor should be able to demonstrate a clear and coherent investment management process that ties directly to the investment policy statement (IPS).
Why employee education matters
The most important factor in the success of your company's retirement plan is whether or not employees understand and appreciate the benefit you provide.
Helping employees understand and make informed decisions about their participation in the retirement plan is not only a fiduciary responsibility, but it is critical in helping them reach their retirement goals.
An effective communication and education program has one primary goal – to help employees participate productively so they can retire with adequate assets. In recent years, regulatory changes have placed even greater responsibility on plan sponsors, including heightened fiduciary responsibilities, fee disclosures, and expanded audit and reporting requirements. Although many of the changes that have occurred have contributed to an overall improvement in defined contribution plans, e.g., fee transparency, introduction of target date funds, etc., little has been done to ensure participants are any more prepared to retire.
The 2015 Retirement Confidence Survey published by the Employee Benefit Research Institute shows that only 58% of workers are either very confident (22%) or somewhat confident (36%) they will have enough money to live comfortably in retirement.
While today’s retirement plans utilize the Internet and other technologies to offer more features and services than ever before, many participants still feel woefully unprepared to make informed investment decisions. Consider the following:
In addition to the financial pressures of everyday living, many employees are simply overwhelmed about making retirement plan decisions. Perhaps the biggest hindrance to improving participant outcomes is employee inertia. Most employees understand the need to save for retirement but lack the expertise, desire, and/or time to take the necessary steps to put a plan into place.
Education is not advice
ERISA has very specific rules for providing advice to employees that the plan sponsor must follow to mitigate liability. Discussions regarding the importance of plan participation, basic retirement planning strategies, retirement income calculators, and the impact of asset allocation on retirement investing are all considered education by the Department of Labor. While investment education guides employees, it cannot give specific answers to their investment questions.
Under ERISA, providing specific, individualized investment recommendations to participants constitutes investment advice – and persons who provide such advice are considered fiduciaries. The importance of employees receiving advice is clear. However, only independent Registered Investment Advisors (RIA) are generally permitted to offer investment advice to participants to avoid triggering fiduciary liability for the plan sponsor.
Studies have shown that employees who rely on professional investment advice
The benefit of automatic enrollment
Approximately 30 percent of eligible workers do not participate in their employer’s 401(k)-type plan. Studies suggest that automatic enrollment plans could reduce this rate to less than 15 percent, significantly increasing retirement savings. Automatic enrollment 401(k) plans offer many advantages.
An automatic enrollment plan:
Automatic enrollment can encourage a higher level of employee participation and makes it easy for employers to withhold contributions and select the investments for those contributions.
U.S. Department of Labor
U.S. Securities & Exchange Commission
U.S. Internal Revenue Service