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Fiduciary Mistakes 401k Fiduciaries Frequently Make

Fiduciary Mistakes 401k Fiduciaries Frequently Make 

Fiduciary mistakes in the 401k Plan can come in many shapes and sizes.  The shape of a fiduciary mistake can be demonstrated by intent or through a lackluster effort.  Regardless of what causes a fiduciary foible, there are recurring themes of which every plan fiduciary needs to be aware.  At the conclusion of a Plan Sponsor University (TPSU), Fiduciary Education Program held at Wake Forest University, TPSU Founder and CEO, Fred Barstein spoke with TPSU Adjunct Lecturer, Kathleen Kelly, Founding & Managing Partner at Compass Financial.  Ms. Kelly spends time discussing the Top Fiduciary Mistakes. It was an educational exchange between Ms. Kelly and Mr. Barstein.  Learn why Fiduciary Governance, Fee Analysis, Committee Structure, Share Class variation and Measuring Outcomes rank high on the list of Fiduciary Mistakes.

Full Transcript Here

Fred B.:
This is Fred Barstein with TPSU and 401k TV. And we just completed a TPSU program with our newly minted adjunct lecturer, Kathleen Kelly.

Kathleen K.:
Thank you.

Fred B.:
Kathleen is one of the leading DC consultants recognized by Barron’s, pensions and investments, plan advisor, Napa, and really is the founding partner and managing partner of Compass Financial based here in North Carolina. But, has plans all over the country. So, welcome Kathleen.

Kathleen K.:
Thank you. Thank you.

Fred B.:
Do you mind if we ask you a few questions?

Kathleen K.:
Certainly.

Fred B.:
So, in your lecture today on campus you talked about the 10 things that planned sponsors, fiduciary things, that they don’t do right and probably do wrong. And we don’t have time for 10.

Kathleen K.:
No, we don’t.

Fred B.:
So, give us the top three.

Kathleen K.:
So, I’ll do the consolidated version.

Fred B.:
Right, since we only let you do seven anyway.

Kathleen K.:
That’s right. So, the first was really around foundational governance. Having good fiduciary governance processes in place.

Fred B.:
Of course, yeah.

Kathleen K.:
You know, the basic blocking and tackling, ensuring that the committee had actually been appropriately delegated authority, making sure that there is a planned charter, by-laws, fiduciary acknowledgment letters by committee, understanding that new committee members need to have training around the basics of understanding their fiduciary responsibilities, having on-going training. And really just ensuring that the structure starts off correctly from the beginning. And it’s not uncommon for us when we are hired to see that a plan sponsor is unable to put their hands on board resolutions that perhaps appointed the committed. Or, that fact that there is a committee charter, maybe, at some point there was, but who knows.

Fred B.:
Very good.

Kathleen K.:
So, having just a good, solid fiduciary structure in place that also lends itself to doing things like maintaining committee minutes so that decisions can be documented. Not only, for purposes of identifying the rationale behind decisions that the committee made in the process. But also, it’s so helpful when there’s turnover with the committee and new people come on and they want to understand how the committee has made decisions in the past. So, that was really the first one.

Fred B.:
Really? One of the things, I’m not sure we’re going to get to three. One of the things that you talked about, which I’ve always confused this is different between Settler and administrative functions and how the DOL is focused on that.

Kathleen K.:
Mm-hmm (affirmative). Yeah, you know, it’s an interesting topic. It’s not one that gets a lot of press but is starting to get more press because the DOL is more interested in the topic, which is around Settler versus Fiduciary Activities and whether or not the committee has been charged with having the authority to just make fiduciary decisions. So, things like selecting and monitoring plan investments, and carrying out the duties of the plan versus, are they wearing the hat of the business and making the business-related decision around plan amendments, plan design. Where there, oftentimes, is a cost involved in those types of decisions. If a plan is going to do auto-enrollment or change a stated match, become a safe harbor, those types of decisions.

Fred B.:
And getting advice on that. And the big thing is that Settler functions can not be paid out of plan assets.

Kathleen K.:
Plan assets.

Fred B.:
Which is what the DOL is looking at. Okay, so let’s do two more. What else?

Kathleen K.:
Okay, quickly two more. As much as I don’t like to have to talk about fees, it is certainly something that’s top of mind to planned sponsors.

Fred B.:
Sure.

Kathleen K.:
So, just having a good understanding of how plan fees work.

Fred B.:
Right.

Kathleen K.:
A couple of the things that we addressed in this session, were not only around benchmarking and using appropriate benchmarks to identify fees. But also, looking at fees, not solely in a vacuum. Fees commensurate with services. Additionally things like fee leveling and revenue sharing and often, the disparity that occurs in a plan if the services are being paid for by revenue sharing to the record keeper, you often see one participant subsidizing another.

Fred B.:
Right. Sure, because they’re paying a higher … They don’t even know it.

Kathleen K.:
They don’t even know they’re paying a higher revenue sharing and another participant who’s in an index isn’t paying any at all. So, we discussed that. We also discussed the per head versus the basis point and really evaluating that. If plan assets have grown significantly, yet the basis point for the record keeper has stayed the same.

Fred B.:
Kind of like a flat fee.

Kathleen K.:
Yeah, the participant is essentially paying more on a per head basis when that’s really a more relevant approach to fee assessment. And then, lastly, around share class inefficiency, which is just … it’s unfortunate industry phenomenon that we must live with, which is that just because one share class on a net expense ratio is less than another, it doesn’t mean that after revenue sharing credits are taken into accounts, that remains true.

Fred B.:
Well, I’m dedicated to getting rid of that.

Kathleen K.:
I would love to see that be gone as well.

Fred B.:
And go to like a CIT, purely institutional.

Kathleen K.:
Purely institutional.

Fred B.:
Yes.

Kathleen K.:
But the CIT is also, not necessarily, always the cheapest relative to a share class that has revenue sharing.

Fred B.:
It does, right. So, is there one more?

Kathleen K.:
Oh, one more. The last thing is, you know, every company or organization measures results. They want to know the ROI on the decisions that they make. And looking at the 401k plan the same way is sometimes not addressed by planned fiduciaries. In other words, is the plan actually fulfilling the goals and objectives that the planned fiduciaries have set forth? Is it performing?

Fred B.:
Performing.

Kathleen K.:
Are your participants in better shape today for retirement than they were three, five, 10 years ago.

Fred B.:
[crosstalk 00:06:38]

Kathleen K.:
Are you making progress toward that goal, and if not, what needs to occur for that to happen.

Fred B.:
And sometimes because they’re not writing a check, they don’t pay attention to it. But it’s still really critically important.

Kathleen K.:
It is.

Fred B.:
So, final question. This was your first TPSU, what did you think? And why did you do it?

Kathleen K.:
Oh, it was a lot of fun. I really enjoyed it. We had a full house here at Wake Forrest, which happens to be my alma mater, so that was also nice. I enjoy helping people. I enjoy seeing a light bulb go off when you say something and you can see the wheels turning in someone’s mind about how whatever it was might be applicable to them in their population and their participants. So, I really enjoyed it. It was a great group. Very engaged.

Fred B.:
Very good.

Kathleen K.:
So, it was a lot of fun.

Fred B.:
Well, thank you.

Kathleen K.:
Thank you.

Fred B.:
And we will see you in six months.

Kathleen K.:
That’s right.

Fred B.:
And we’ll do it again. And this time, maybe, my flight won’t get canceled and I won’t have to take the train.

Kathleen K.:
But you made the extra effort and I appreciate that.

Fred B.:
I said if I had to crawl I’m coming here because I think you would be mortified if I wasn’t here this morning, right?

Kathleen K.:
I may have been.

Fred B.:
But I’m glad I could make it.

Kathleen K.:
Yes, me too.

Fred B.:
And thank you for your participation and your service. And Thank you for watching 401k TV, stay tuned.

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