Managing a retirement plan is a demanding task, as it involves navigating complex rules and regulations, tailoring a plan to a business’s specific interests, as well as offering financial education and opportunities to the employees of the Company. This is added on to the main responsibilities of simply managing a business and delivering a valuable service. With all those varied responsibilities, even the most well-intentioned Plan Sponsors can make mistakes that may result in costly consequences, such as increased plan expenses or potential legal liabilities.
In this article, we will explore the five biggest financial mistakes we see made by Plan Sponsors, and provide guidance on how to avoid them. By understanding and addressing these pitfalls, Plan Sponsors can significantly improve their fiduciary oversight, reduce risks, and ultimately offer a better retirement plan for their employees.
1. Failure to Create a Retirement Plan Committee
In order to manage fiduciary responsibilities, oversee plan operations, and make informed decisions about your plan and any potential changes, it takes a good deal of focused attention. A retirement plan committee provides that focus and is a critical part of the fiduciary governance process in operating your retirement plan. All too often, however, we see that no committee has been formally established or authorized by the governing authority, such as the Board of Directors or the equivalent at a firm or organization. With a clear and documented governance structure that includes who is on the committee, how frequently the committee meets, and how decisions are made, that committee can then review the overall plan design on a regular basis. That regular review process helps implement best practices and demonstrates that fiduciary duties are being met.
2. Neglecting to Create or Update an Investment Policy Statement
Another area that Plan Sponsors sometimes neglect to adopt fully or update regularly is an Investment Policy Statement (IPS). An IPS is a crucial document that guides the selection, monitoring, and replacement of plan investments. It should outline the purpose of the IPS as well as the Plan, the responsibilities of the various parties involved in the investment selection and monitoring process, the investment choices including the selection of the QDIA, the criteria for selecting and evaluating investments including both the quantitative and qualitative factors used for that selection, the ongoing evaluation methodology and monitoring process for the investment policy, and fund performance, to name a few. The IPS is another key component of demonstrating how plan fiduciaries are meeting their responsibilities, as well as seeking ways to continually improve the plan. The only thing worse than not having an IPS is having one, but not following its policies and procedures. It is important for plan fiduciaries to review the IPS periodically to ensure that it is being followed.
3. Infrequent or Nonexistent Committee Meetings
While we all get busy, and are tempted by the idea of skipping certain meetings, Plan Sponsors must hold regular, periodic Committee Meetings complete with an Agenda and Minutes. Items to be addressed should include plan design and compliance related issues, plan level data and their trends, fiduciary governance issues, plan investment performance, review of the underlying investment alternatives, and participant education, to name a few.
In addition, Plan Sponsors should maintain detailed records of these meetings, including Minutes and documentation of decisions made. Failure to hold and document periodic Committee Meetings can expose Plan Sponsors to legal risks and potential challenges from plan participants or regulators.
4. Failure to Benchmark Your Plan
The Retirement Plan Industry and its Service Providers are in constant motion. Three years can be a lifetime when it comes to features offered, services provided and fees charged to the plan. Regulation, Legislation, and Litigation also bring changes to policies, procedures, and plan design. Indeed, your business continues to change and the initial objectives that you established for your plan may have also changed in light of the post-COVID world. Unfortunately, all too often, Plan Sponsors do not take the necessary time to benchmark their plan on any of these levels and participants end up missing out on newer features or plan designs available or by higher costs paid.
There are essentially three ways to benchmark your plan – a paper based version comparing similar type/size plans to published data, working with an Advisor to perform a limited-scope review of the top 3-5 Plan Providers in the industry, or conducting a full scope Request For Proposal (“RFP”) process that includes preparing the questions for Service Providers to respond to, reviewing those responses, narrowing the field down to several candidates, and holding one or more rounds of presentations before deciding on a winner. Some form of review needs to happen every 3-5 years to ensure that your plan remains “fresh” and current from plan design, to investment offering, and costs paid. Failing to benchmark, review, and substantiate reasonable fees can cause an erosion of the value held by plan participants, as well as be a fiduciary and compliance issue if fees are found to be excessive.
5. Not Benchmarking Target-Date Funds
Target-Date Funds are a popular option among Plan Sponsors, as they help simplify the investing process for employees as well as employers. In most plans, they are also selected as the plan’s Qualified Default Investment Alternative or QDIA which heightens their importance for review. That said, there are certain Department of Labor (DOL) Guidelines that Plan Sponsors need to follow in documenting and benchmarking their plan’s specific TDF funds. All too often we find Plan Sponsors have not developed a process consistent with the DOL’s guidelines for reviewing TDFs periodically and that could spell trouble for plan fiduciaries.
Target Date Funds continue to evolve with “To”, “Through”, or “Mid” glide paths; Active, Passive, or Blended styles of investment management and Dynamic or Static approaches tied to Managed Accounts as a dual QDIA structure. It is critical to benchmark your target date fund selection. Target-Date Funds should be in alignment with the plan’s objectives and participant demographics, and be benchmarked against other options available in the marketplace or on the Recordkeeper’s platform. As more and more plan assets migrate into Target Date funds, this is becoming an increasing area of focus for the DOL.
Avoid These Retirement Plan Mistakes
As a Plan Sponsor, you’ve got your hands full with a wide variety of responsibilities. And the fact is that you simply can’t be good at every single thing. If you’d like help from specialists with decades of experience in this field, I would love to meet with you. Schedule an introductory meeting by contacting me at (818) 262-3458 or firstname.lastname@example.org.
Steve Sansone has over 30 years of experience in the retirement plan industry and is the Managing Director of the Valencia office at SageView Advisory Group, one of the largest Registered Investment Advisor firms specializing in retirement plans. As an Accredited Investment Fiduciary® and Certified Plan Fiduciary Advisor practitioner, Steve works with professional service groups and companies of all sizes seeking to create a world-class retirement plan experience for their plan participants. He serves as an ERISA 3(21) or 3(38) Advisor, bringing independent, conflict-free services to both Plan Sponsor Committees and retirement plan participants. Steve’s expertise in Cash Balance Plans spans nearly 20 years and is one of the few Advisors in the industry that understands both sides of the Cash Balance equation: Actuarial and Investments. He considers his work to be the greatest financial rescue mission of this time, helping people retire on time, sufficiently prepared to write the next best chapter of their life. To learn more about Steve, connect with him on LinkedIn.
SageView Advisory Group, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where SageView Advisory Group, LLC, and its representatives are properly licensed or exempt from licensure. No advice may be rendered by SageView Advisory Group, LLC unless a client service agreement is in place.