3 Reasons to Document a Prudent Process for Evaluating Target Date Funds

Posted by: Dorann Cafaro in Investments, Latest Stories, Selecting & Monitoring, Target Date Funds December 26, 2016

Evaluating Target Date Funds -ORIGINALLY PUBLISHED August, 2016

In an earlier post we explained why it is so important to have a prudent process when selecting your plan’s target date fund or other QDIA options. We also discussed 10 questions that a lawyer might raise to challenge the prudence of your decision making process for your target date fund selection or retention. Today we focus on the importance of documentation – starting with a written Evaluation Process Statement (EPS).

What is an Evaluation Process Statement (EPS)? An EPS is a written document that describes in detail a complete sequence of steps for selecting and monitoring investments, including the qualified default investment alternative (QDIA) and target date fund, that incorporate your plan’s investment objectives, fiduciary priorities and risk constraints.

Why should a retirement plan fiduciary care about better decision-making, much less worry about documenting that decision process with an Evaluation Process Statement? Here are three reasons:

Fiduciary Protection

The number of lawsuits against plan fiduciaries continues to grow, with headline settlements in 2015 including $140 million against Nationwide, $62 million against Lockheed Martin and $57 million against The Boeing Co. Most of the targets have been large plans leading some fiduciaries to believe that their plans are too small to attract the attention of class action lawyers. That might have been true in the past but the world changed in 2016, with lawsuits filed against a $9 million and a $25 million plan. You no longer need to be a large plan to be the target of a breach of fiduciary lawsuit.

Poor investment performance often triggers participant lawsuits and target date fund often holding the largest percentage of a plan’s assets are very vulnerable to scrutiny which is why it is so important to be able to show that, despite the outcome, your plan’s fiduciaries followed a prudent decision making process. You might not always be able to outrun the wolves but preparing and, most importantly, documenting that you have followed a well-crafted Evaluation Process Statement will put you far ahead of the herd.

Operational Efficiency

One of the problems with traditional investment policy statements is that that they often are heavy on general objectives and light on specifics. Writing about the investment policy statement tightrope, Kevin Turner of Russell Investments explains that “[t]here is a fine balance between the general intent of an investment policy statement to demonstrate procedural prudence vs. the risk associated with any prescriptive language embedded in such documentation.”

Checklists are a very effective way to boost efficiency and reduce mistakes. They can distill years of wisdom into a format that is easy for us to absorb and implement – the 10 Rules on Trust from Don Trone or Chris Carosa’s Top 10 checklists for every 401(k) plan sponsor being great examples for plan fiduciaries.

A well-written Evaluation Process is essentially a checklist that helps fiduciaries to complete every step of their prudent decision making process as quickly and efficiently as possible. It can help you to repeat success and identify weaknesses in your process before they become a cause for litigation.

Better Outcomes

There is growing evidence from OECD average effective retirement age statistics, BLS labor force participation rates, a recent Gallup survey and the Willis Towers Watson Global Benefits Attitudes Survey that workers are delaying their retirement simply because they cannot afford to stop working.

Delayed retirement directly increases employer costs. According to Hugh O’Toole “There is a common misconception that employers eliminated financial risk with their switch from defined-benefits to DC retirement plans. What companies didn’t factor into the equation was the financial impact associated with employees who remain in the workplace after age 65.” There is a quantifiable economic impact of employees not being ready to retire, including not only higher wage and healthcare costs but also lost productivity as employees worry about their financial well-being.

Following a written EPS will make it easier for plan fiduciaries to consistently make better decisions that enable employees to retire on their desired schedule and with dignity and this can have a direct positive effect on the company’s bottom line.

Start making better investment decisions now by creating an Evaluation Process Statement (EPS). Make today a better decision-making day!

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Dorann Cafaro

Dorann is a retirement consultant dedicated to fiduciary protection of plan fiduciaries (sponsors, committee members, fiduciary advisors) and SmartPension DB plans. She is working closely with Bdellium to provide fiduciaries with decision-support tools. Dorann was the founder of Cafaro Greenleaf, with roots going back as far as 1981 with long term partner and daughter Jamie Greenleaf. Dorann was Senior Vice President of Fiduciary Benchmarks, an Executive Vice President for National Retirement Partners, a leading national network of independent retirement experts now an LPL company. Dorann has been nationally recognized throughout the retirement industry, a frequent and keynote speaker on the retirement industry at national conferences and seminars. She was inducted to the PLANADVISER's Hall of Fame in 2011, named Retirement Advisor of the Year by PLANSPONSOR magazine 2006, and 401k Wire's 50 most influential people in the 401k retirement industry for 2006 to 2011 and has testified in front of the USDOL.