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Retirement Planning > Retirement Investing

Six Best Practices to Mitigate Fiduciary Risk in Retirement Plans

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Lockton, a risk management, insurance and employee benefits provider, released a report on Tuesday  that outlines six best practices for retirement plan sponsors that emphasized a sponsor's fiduciary responsibilities.

The report authors note that a fiduciary is "determined by action, not by title."

Lockton identified the most common risks faced by fiduciaries in defined contribution plans:

  • Failing to produce an investment policy statement, or failing to update the statement to ensure consistency with investment decisions.
  • Not having appropriate plan governance, including plan committees or investment committees.
  • Failing to meet regularly and document committee meetings.
  • Failing to act when funds need to be replaced.
  • Not making timely plan contributions.
  • Lack of understanding of costs, revenues and implications for plan participants.
  • Failing to understand contracts with vendors, or to regularly review service agreements.
  • Not following plan document provisions.

Although not a comprehensive list, Lockton maintains these are common problems among retirement plan sponsors. The firm outlined six best practices to help plan sponsors reduce the liability associated with these problems.

First, the company recommends getting the help of an expert if needed. "Fiduciaries have a requirement to act as a prudent expert," the authors write. "Dedicated retirement plan advisors can guide fiduciaries through this process." Sponsors should look for advisors who specialize in retirement plans, and have worked with them for a number of years. Knowledge of vender relationships is another important quality in an advisor.

Sponsors should form a retirement plan committee with the responsibility to take action on the plan's behalf. The committee should meet regularly and document all discussions and decisions.

Additionally, plan sponsors should write an investment policy statement. "An IPS provides the documentation and the process a plan committee will use to select, monitor and replace funds," the author's write.

Another best practice sponsors need to consider is to understand their contracts, services, expenses and revenues. Sounds simple enough, but Lockton encourages sponsors to benchmark their fees and negotiate to make sure they're appropriate. Furthermore, sponsors should understand that many investments pay revenue to the recordkeeper. "Know the revenues accrued for your plan and how these revenues compare to your plan expenses," the authors urge. "Excess revenues should be accounted and utilized for the benefit of the plan and plan participants."

Sponsors need to know the plan well, and administer it according to the plan document. If it doesn't meet their objectives, sponsors should work with their attorney to amend the plan.

Finally, plan sponsors must understand whether they are a fiduciary. The authors note that sponsors are responsible for their co-fiduciaries actions and could be responsible for any breaches of conduct.


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