CEOs Must Monitor Their Company’s Retirement Plans or Take Responsibility for Costly Mistakes

A recent Supreme Court ruling making it easier for retirement plan participants to sue organizations acting as plan sponsors should alert CEOs to scrutinize retirement plan investments on a regular basis.

The 9-0 decision in May held that fiduciaries of plans governed by the Employee Retirement Income Security Act (ERISA) of 1974 have a continuing duty to monitor plan investments and remove imprudent ones. The court also ruled that a lawsuit will be timely if it is brought within six years of an alleged breach of the continuing fiduciary duty to prudently monitor plan investments.

“Beyond the legal risk is a financial one: many participants are paying too much for the plan, which should raise the ire of board members and shareholders.”

The ruling in Tibble v. Edison International underlines the complex legal responsibilities inherent in sponsoring a plan, including the oversight of the selection and ongoing monitoring of investment options for retirement plan participants.

Plan sponsors, whether they offer 401(k)s or traditional pensions, are required to act as fiduciaries. Beyond the legal risk is a financial one: many participants are paying too much for the plan, which should raise the ire of board members and shareholders.

In short, CEOs need to address this issue to avoid litigation and to keep costs in check.

Here are 10 questions CEOs should ask their plan fiduciaries (e.g. CFO, HR team, benefits person, etc.):

  • Are we doing enough to protect ourselves from fiduciary liability under ERISA?
  • Do we have a formal investment policy statement for our plan(s)? When was the last time it was reviewed and or updated?
  • Do we understand what the plan is currently paying for its investments? Have we ever benchmarked our investment performance, fees, provider, consultant and custodian?
  • Do we use a brokerage firm in any kind of consulting function? Do we understand how they get paid?
  • How often do we meet with our current providers? Who are they? Have we inquired about SEC enforcement actions?
  • Does our advisor or manager sign on as a fiduciary? If so, what kind of fiduciary (i.e. 3(21) or 3(38)?
  • Is the committee satisfied with the returns achieved based on level of risk, and do they understand how they compare to appropriate benchmarks?
  • Do we understand the investment menu design and options offered? Are we offering investment options that charge participants the lowest fees available?
  • Have you received and reviewed all 408(b)(2) disclosures as required by the Department of Labor (DOL)?  Based on the review, did you determine that fees were reasonable for the services provided?
  • When was the last time we did a full due diligence review?

Retirement plan participants are becoming more educated about investments, fees and share class structures. ERISA fiduciary standards require you, the plan sponsor and the fiduciaries, to offer products and services in “the best interest” of your participants, not just ones that fall into the category of “suitable investments.”

Could all this necessary monitoring mean more work for plan sponsors? Probably. Could failure to comply be costly? Absolutely.

Mark Dixon and Susan Shoemaker are Partners of Plante Moran Financial Advisors. Mark leads the Institutional Investment Consulting practice, and Susan leads the Qualified Plans practice.

 


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