Some Basic Advice to Plan Investment Fiduciaries
Capital markets worldwide have recovered from their 2009 lows, but remain in a protracted period of extreme volatility and we continue to experience wide swings in market sentiment that seem to defy explanation. Though market fluctuations affect all retirement plans with assets to invest, the unstable investment environment is particularly worrisome for plan participants who control their investments (for example in 401(k) and 403(b) plans) and for the investment fiduciaries who must select and monitor the investment options. In this context, we are often asked to provide guidance to retirement plan fiduciaries that have responsibility for the investment of plan assets. Lawyers and other professionals have commented widely on the good habits and best practices that should be followed by investment fiduciaries, and there are many good resources for guidance. We expect to return to this subject from time to time, but here are a few basic thoughts and guidelines to consider.
Over the past couple of years, a number of new regulations have been issued by the U.S. Department of Labor dealing in particular with the disclosure of "hidden fees" that erode the investment returns of plan participants. These new rules put more pressure on plan investment fiduciaries to understand the fee and compensation arrangements that are embedded in the investment options that they make available to plan participants. But the new rules really just build on the basic framework already contained in Part 4 of ERISA, including basic obligations:
- under Section 404(a) of ERISA, to abide by the "prudent expert" and "exclusive benefit" rules, and "diversif[y] the investments of the plan so as to minimize the risk of large losses";
- under Section 404(c) of ERISA, regarding the administration of investment arrangements for individual account plans and the provision of investment control to participants; and
- under Section 408(b) of ERISA, with respect to the terms under which a plan may engage service providers.
Based on those core obligations, here is a basic checklist of things investment fiduciaries should do with respect to the investment of individual account plan assets in order to enjoy the protections afforded to fiduciaries of plans that allow for participant-directed investments:
- Prepare a Statement of Investment Policy that provides meaningful guidance regarding the prudent selection (and monitoring) of investment options, but does not create obligations or parameters that will handicap the ability of investment fiduciaries to exercise some discretion in the fulfillment of their duties;
- Make a prudent selection of investment funds (consistent with the Statement of Investment Policy), investment advisers and other plan service providers;
- Monitor the performance of the investment funds, advisers and service providers;
- Understand the fee and compensation arrangements with advisers and service providers;
- In engaging in all of these activities, use outside independent advisors as needed to assure that the fiduciaries have the expertise necessary to make prudent decisions; and
Document the process and the decisions made in contemporaneous records (such as meeting minutes)! The best process in the world will only protect fiduciaries if they can demonstrate that they followed it.