Plan sponsor have a fiduciary responsibility to act prudently and with undivided loyalty to the plan and its participants. As we have discussed in previous commentaries, this applies when selecting or monitoring their plan investments including the Qualified Default Investment Alternatives (QDIA) and any Target Date Fund (TDF) used outside the QDIA.
The first step to a prudent process is to design a complete, auditable and repeatable sequence of steps that leads from input data to a final decision. Do you have a prudent process in place and do you fully understand how it ensures that your investment decisions were in the best interest of the plan, its participants and beneficiaries? This seems straightforward to answer until looked at though the lens of recent lawsuits. In a legal challenge the plaintiff’s expert witness is likely to focus on how you made this decision and how the investments are being monitored after selection.
- Does the decision process comprehensively evaluate relevant performance, risk and operational criteria?
- Does the process explicitly take account of how important or unimportant each of the evaluation criteria is to your plan?
- Does the process take plan demographics and participant behavior into account?
- Does your process enable you to simultaneously evaluate all candidates (both off-the-shelf and custom) across all criteria?
- Does your process enable you to balance each candidate’s different levels of performance across multiple evaluation criteria?
- Does your process individually rank all candidates?
- Is your decision process repeatable and auditable. In other words, given the same set of data, would your process always produce exactly the same result, independently of who conducts the evaluation?
- Do you understand how every input is calculated and what it means?
- Do you understand any major limitations or risks in using particular measurements or methods?
- Do you understand how the process uses its inputs to arrive at the final results?
Start by identifying the goal of your process and end with a specific recommendation best meeting this goal specifically for your plan. This first step is best done in a written format.
