There are seven main functions that a retirement plan advisor must perform to satisfy plan sponsors, according to a white paper released by Strategic Benefit Services. SBS is a retirement plan and employee benefit consulting firm.
1. Assisting and educating on fiduciary responsibilities. Advisors need to help their sponsor clients meet their fiduciary duties. The paper noted that sponsors’ main motivation in hiring an advisor is to mitigate the risk of legal action being taken against them. “Often, fiduciaries’ main concern and motivation for hiring a Plan Advisor is avoidance of legal action that can be brought against them as individuals,” according to the paper.
Educating sponsors on their responsibilities as fiduciaries is an important function for retirement plan advisors, especially regarding defined benefit plans. “Plan Advisors who are hired by defined benefit plans that fall under ERISA serve their clients well by educating them on their fiduciary role and by establishing fully documented procedures to ensure compliance.”
2. Helping establish a suitable investment policy statement. Advisors must help sponsors establish investment policies and procedures for sponsor clients. SBS suggested writing these policies in a way that leaves room for fiduciaries to use their best judgment given each case. “Rigid investment policies that are not followed could be used against the fiduciaries in a court of law,” according to the paper.
Having a well-written policy isn’t enough, though. Advisors should also review the IPS at least every two years, or any time significant regulatory changes are made.
3. Managing requests for proposals from service providers. A third reason sponsors hire a retirement plan advisor is for help with requests for proposals for service providers. An advisor should step in when a sponsor need support from other providers like custodians, the report noted. Advisors’ in-depth knowledge of the industry makes them ideal candidates to draft proposals. In addition to identifying qualified firms and analyzing their responses, advisors should also facilitate the transition to the new provider.
4. Selecting an investment manager. Similarly, sponsors seek out advisors to help them with investment manager selection. Using the criteria listed in the IPS, the advisor identifies potential managers and provides a list of finalists. After the sponsor selects a manager, the advisor provides quarterly due diligence.
5. Replacing poorly performing managers. In the event that a manager fails to live up to the criteria required by the IPS, advisors should determine whether the manager needs to be replaced right away or if there are other reasons for underperformance that don’t justify finding and selecting a new manager.
SBS noted that if a manager is placed under review, it should be made clear that it’s a temporary status while the advisor reviews what needs to be done as quickly as possible.
6. Providing performance reports. Performance reports should include typical information like market commentary, manager status reports, a summary of investment performance and disclosure of investment fees.
Furthermore, the performance report should also include for investments made by the plan participants the dollar amount in each option and the percentage of the entire plan. For fiduciary-directed portfolios, performance reports should include a comparison of the current and target asset allocations and an analysis of which components influenced performance.
7. Conducting ongoing due diligence. Finally, these functions need to be performed on an ongoing basis throughout their relationship with the sponsor so that fiduciaries can stay up-to-date on regulatory and market changes.