Hiring a third-party investment advisor for your retirement plan is a meaningful commitment; one that has a lasting impact on your organization and employees. As a plan fiduciary, you want to be sure your chosen provider adds value to the operation and performance of your retirement plan and your employee’s long-term financial wellness and retirement readiness. But how do you determine if your advisor is making the cut?
The Purpose of a Retirement Plan Advisor
The Employee Retirement Income Security Act of 1974 (ERISA) is the key body of law governing corporate retirement plans. It sets forth specific duties that retirement plan sponsors and fiduciaries must be mindful of in the oversight of their plans.
One of the most challenging expectations of ERISA is commonly referred to as the “prudent expert” rule. Stated simply, plan fiduciaries’ decisions will be measured against the decisions that would have been made with the case, skill, and diligence, of an expert. This applies to the plan governance process, investment selection and monitoring, and compliance with the plan’s documents.
Few organizations have this level of expertise within their employee ranks. Therefore, they wisely look to a retirement plan advisor for help.
The purpose of a retirement plan advisor is to sit alongside plan fiduciaries and to help them understand and fulfill their responsibilities to the retirement plan and its participants. The investment advisor should serve as a fiduciary to the plan thus aligning their interests with those of the plan sponsor.
Retirement Plan Advisors Don’t Have Report Cards
ERISA lays out a lot of rules, but it and regulatory agencies charged with enforcement do not spell out specific criteria to evaluate the performance and value added by a retirement plan advisor. In effect, there is no standard report card.
That leaves plan fiduciaries to wonder: How do you determine if your current advisor measures up?
Five Areas Your Advisor Should Add Value
- Formal and Ongoing ERISA Training for Plan Fiduciaries: Being a fiduciary to a retirement plan is serious work. You need to understand your fiduciary duties so you can not only carry them out effectively but also avoid the repercussions of a breach of duty. Your advisor should ensure your retirement plan committee understands ERISA’s requirements. Additionally, your advisor should regularly lead discussions explaining your role and responsibilities to plan participants and help you stay up-to-date with changing legal, regulatory, and industry trends.
- Review and Maintenance of an Investment Policy Statement: Part of a diligent plan oversight process is the development and upkeep of an investment policy statement (IPS). An effective IPS helps protect plan fiduciaries by identifying roles and responsibilities and outlining a formal plan oversight process. Your advisor should not only be able to draft, review, and update the IPS for your plan but also document that it is properly followed.
- Investment Manager Due Diligence: Most advisors focus their activities primarily on the investment menu’s performance. They’ll help you pour over lengthy reports, prepared by their back office or purchased from third-party research organizations. But how well do they really know and understand the managers and the reasons for the performance? If your advisor isn’t actively involved in research, they may lack the necessary insights required for the prudent selection and termination of an investment menu option. Your advisor’s in-depth understanding of a fund management team and the process they employ ultimately drives the success of your investment manager decisions.
- Plan Fee Analysis and Negotiation: Excessive plan fees are one of the most prevalent items resulting in an ERISA lawsuit. It’s not enough to review the required fee disclosures provided by your service providers. You need to understand all aspects of your plan’s costs, benchmark those costs, and determine their reasonableness. Your advisor should proactively assist you in understanding, managing, and negotiating your plan fees.
- Review Plan’s Effectiveness, but Keep Looking Forward: An effective plan is more than just low costs and above-average investment performance. Your advisor should formally provide annual reporting on plan design, insights into participant engagement, legislative updates, and documentation of your efforts to satisfy your ERISA duties. Anticipating emerging industry trends and prompting you forward with proactive recommendations should be a key value-add provided by your advisor.
What To Do Next
Evaluating your retirement plan advisor based on these five areas will help you determine the value added by this key relationship. If you’re not sure how to get started, consider discussing the following questions with your retirement plan committee members:
- Is your Investment Policy Statement (IPS) current? Do we formally review the update this document annually?
- How often does our advisor interact directly with the investment managers utilized in our menu?
- Can we demonstrate that, on an annual basis, we have benchmarked the individual components of our plan’s costs (i.e., recordkeeping, investment management, and plan advisory fees)?
- Do we possess documentation that our plan has been reviewed annually for compliance with ERISA’s provisions?
- As new members join our retirement plan oversight committee, are we providing them with a proper understanding of the expectations of ERISA and training them on fulfillinf their duties as fiduciaries to our plan?
By understanding these five aspects of your plan and digging into these questions, you can ensure that your retirement plan, its fiduciaries, and its participants are set up for success.
