Some business owners and retirement plan sponsors may become nervous when they come to even a partial understanding of what it means to be a fiduciary. With new federal regulations in 2012 requiring that costs associated with retirement plans be "reasonable and fair," it's enough to make any company owner anxious.
While this is no time for blissful ignorance, becoming a prudent fiduciary isn't cumbersome or difficult. It does require knowing, adopting and implementing the proper steps to insure insulation from any personal liability. Seeking education regarding this topic is essential for anyone with retirement plan responsibilities.
The reality is that most plan sponsors are unaware of the term "fiduciary" and what it means to be a fiduciary. Fiduciary means simply "retirement plan sponsor." To understand fully the implications of the term, it helps to learn a bit of history about the retirement plan industry and its relevance to plan sponsors today.
The first private retirement plans were pensions created by the nation's first billion-dollar industry the railroads. The idea was to offer workers security in their old age but the concept failed miserably. Instead of stockpiling reserves, railroad pensions were underfunded due to paying current benefits using current revenues. The government stepped in to bail out the troubled plans by passing the Railroad Retirement Act of 1934.
The 1963 collapse of Studebaker the oldest major automaker at the time led to comprehensive federal regulation of pensions and retirement plans. More than 10,000 workers were affected by the automaker's closure. With government intervention, the union and Studebaker agreed to terms for terminating pensions of workers based on years of vested service. The Studebaker collapse is seen as the pivotal moment in which the federal government became involved in employee retirement plans, paving the way for passage of the Employee Retirement Income Security Act (ERISA) in 1974.
ERISA establishes standards of conduct, responsibility and obligations of fiduciaries. It provides employees a means of access to the federal courts to assure their rights are protected and enforced. ERISA defines what fiduciaries are and what they must do. The Department of Labor enforces the regulations of ERISA. What's important to know is that the Department of Labor can randomly audit a company's 401(k) and assess fines.
Are you a fiduciary?
The federal government under ERISA states that a fiduciary is an individual who:
* Exercises any discretionary authority or discretionary control regarding the management of the plan.
* Renders investment advice regarding plan assets for a fee or compensation.
* Has any discretionary authority or discretionary responsibility.
Here are four steps that every fiduciary should follow:
1. Organize your plan. Know the standards, laws and trust provisions that apply to your plan. Your plan should be managing investments in accordance with applicable laws and trust documents and should be written in your Investment Policy Statement (IPS). If your company does not have an IPS, this is an important priority to initiate. Roles and responsibilities of all parties are documented in your IPS. Parties acknowledge their status in writing. As a fiduciary, you are determining the investment goals and objectives, choosing appropriate asset allocations and controlling and accounting for investment expenses. The monitoring of activities of the overall investment program is established in the organization of the plan. Any potential conflicts of interests are defined and disclosed. A quick list to consider in the organization of your plan include:
* Know the rules.
* Define roles and responsibilities.
* Assure no self-dealing.
* Manage service relationships.
* Assure recourse if things go wrong.
2. Formalize your plan. What you are formalizing is the diversification of assets in the plan. Be sure to read the Uniform Prudent Investor Act. (You can contact my office for a free copy if you don't have one.) Make sure your Investment Policy Statement is followed because it is the business plan for management of the portfolio. The IPS provisions drive asset allocation based on time horizon, required return, expected investment risk and the correlation between assets.
3. Implement. This is all about due diligence. Is your plan implementing strategies in compliance with the required level of prudence? Is due diligence consistently applied? Document, document, document! Having a benchmark assessment will help you in this area. Here's suggested minimum criteria checklist for you to consider:
* Regulatory oversight - managed by bank, insurance company, registered investment company
* Minimum track record - at least three years of history
* Stability of the organization
* Assets under management
* Holding consistent with style
* Correlation to style or peer group
* Expense ratios/fees
* Performance relative to assumed risk
* Performance relative to a peer group
4. Monitor. Are you asking the right questions? Gather facts, analyze them and act based upon the evidence. Always document your deliberations and decisions.
Jamie Cooke is an investment and retirement coach and principal with MC2 Wealth Solutions in Reno and holds Accredited Investment Fiduciary designation from the Center for Fiduciary Studies. Contact her through Jamie@mc2wealthsolutions.com.
