A company’s new executive team was recently tasked with becoming the fiduciaries for the company’s 401(k) plan, which took significant actions and made effectual plan changes in an effort to fulfill its fiduciary responsibilities. Here’s how:
The policies, vendors and expectations had been in place for many years, and therefore were not in-line with current fiduciary standards. The team ultimately took on an overhaul of fiduciary processes to create a new age of stewardship and fiduciary responsibility. The team met with a few fiduciary consulting firms and engaged one of the firms to complete a fiduciary review of all aspects of the plan’s governance.
One of the main goals of the new team was for a newly established plan committee to become an independent entity receiving full disclosure from the providers from whom they enlisted help and expertise. Upon receiving the fiduciary review of the plan’s structure, the team found several areas of sound plan governance were lacking: a formally structured investment committee holding regular meetings, an investment policy statement directing the plan fiduciaries on how they should select and monitor the plan investments, and a process to formally understand and determine the reasonableness of the fees paid to the plan’s providers.
Due to longstanding provider relationships, the firm had ongoing and evergreen contracts. Some of the most enlightening information in the process related to contractual restrictions and caveats that interfered with creating a best-practice fiduciary approach. The team was able to elevate their approach and create a clear-cut fiduciary system that established new practices and ensured they were doing what was best for their employees. In order to address all of these areas, the team worked to update their service model. They started with detailed due diligence to understand all that was included under their current contracts, and in what areas the plan may be falling short.
Initially, the team focused on the plan’s investments. They sought greater transparency, both in allowing participants to understand where their investments were being made and how much they were paying for the plan. A best-in-class investment menu replaced the single fund family approach, and individual fund expenses were reduced through the use of institutional (versus retail) share classes.
As the project progressed, the group made other improvements, including: a better pricing structure with their providers, a higher level of service through better reporting mechanisms and tools for monitoring providers, and the development of an independent fiduciary process, which is conflict-free from the possibility of an advisor seeking higher commissions.
Over time, several changes were made, including: establishing a new plan committee, which includes the executives as well as other company staff, creation of an investment policy statement, thorough and prudent due diligence and fund analysis, fiduciary training for the plan committee members, a process to understand the plan’s fees and their reasonableness, and documentation of the committee’s meetings and decisions.
In a recent discussion, the executives identified several recommendations and insights they learned regarding the creation of a sound process:
- Don’t implicitly assume that your fiduciary responsibility is being upheld because nothing bad has happened.
- Review your processes and providers—not just because it’s a healthy exercise for the organization, but because fiduciary responsibilities requires it.
- If you have not already done so, enlist the help of an independent fiduciary consultant. They can change the way you view fiduciary responsibility and assist with the fiduciary burden.
- Don’t underestimate the power of stewardship. Doing the right thing by your employees will be one of the most rewarding things you can do for your corporation and yourself.
It’s okay to trust, but you must verify by asking hard questions of even your most long-term service providers.
Gordon Tewell, CFA, CPC, is a principal with Denver, Colorado-based Innovest Portfolio Solutions.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
