As a fiduciary managing a company’s retirement plan under ERISA, the law requires that plan sponsors act as a prudent expert. Even though most employers sponsoring a defined contribution plan like a 401(k) or 403(b) are not investment experts, there are three easy ways for them to discharge their duty as outlined in a whitepaper by ADP, Investment Platform Options that Can Lead to Better Retirement Outcomes.
With the help of an investment expert, usually the plan’s advisor, a “due diligence platform” can be established to select and monitor a plan’s investments. Many plans use an IPS (investment policy statement) which is like a recipe that defines the type and quality of the investments desired and against which all investments are compared. You need a plan that is documented that includes constant monitoring (quarterly is the minimum) in order to minimize costs, work and liability as well as improve outcomes for employees.
When a plan institutes auto enrollment, they must established a default investment option known as a QDIA (qualified default investment alternative). Before the 2006 Pension Protection Act (PPA), plans were concerned about liability if the default option lost money so they picked the most conservative one like money market funds which yield low return. Because investors rarely change investments, this choice can be harmful. The PPA gave plans the option to safely use balanced funds like Target Date Funds (TDFs) which has grown as the QDIA to 72% in 2014. Selection and monitoring TDFs is different than with regular investments.
So beyond a platform and process to discharge duties as a prudent expert, plan sponsors can hire an outsourced fiduciary to complete the task. A so-called 3(21) fiduciary recommends investment choices and changes; a 3(38) fiduciary (see 401kTV video) has discretion over their selection. Regardless of the choice, the plan sponsor has the duty to make sure that the outsourced fiduciary is qualified to properly discharge their duties as well as monitoring the performance of the vendor.
The ADP whitepaper also explains how open architecture investment platforms (compared to those with limited choices or those with funds managed by the record keeper) may be prudent as well as zero revenue share funds that do not include extra fees to pay the record keeper, TPA (third party administrator) or advisor. Though there’s nothing inherently wrong with proprietary funds or revenue sharing, open architecture/zero rev share funds can be the safer choice.
Whatever your choice, make sure you consciously make one and have a documented plan because, as the Cheshire Cat warned Alice, “If you don’t know where you’re going, any road will take you there.”
