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5 Critical Components of a Plan Diagnostic Test

September 23
20:08 2009

Conducting a period plan diagnostic test is often seen as an easy way for the typical 401k fiduciary to reduce fiduciary liability. An ERISA plan trustee or fiduciary will usually hire an independent fiduciary consultant to conduct a comprehensive plan fiduciary diagnostic test. A plan fiduciary diagnostic test, to effectively reduce fiduciary liability, must thoroughly examine each of these five critical components of fiduciary liability:

#1) State & Federal Regulatory Compliance – 401k plans fall under the Employee Retirement Income Security Act (ERISA) as maintained by United States Department of Labor (DOL). In addition, certain state may add further regulatory burdens (or opportunities) to the plan for the fiduciary to meet. It’s good to obtain a comprehensive regulatory compliance checklist from your plan’s employee benefits attorney prior to conducting your plan fiduciary diagnostic test.

#2) Service Vendor Fees & Conflicts of Interest – State and federal fiduciary laws generally state the fiduciary must act solely for the benefit of beneficiaries. The fiduciary, therefore, has an obligation to seek the most favorable fee arrangements. In addition, the fiduciary has the duty to insure personal and vendor conflicts of interest do not interfere with what’s best for beneficiaries. Unfortunately, many vendor conflicts of interest lay hidden in complex packages. In general, the DOL expects the 401k fiduciary to: Review the service providers’ performance; Read any reports they provide; Check actual fees charged; Ask about policies and practices, such as trading, investment turnover, and proxy voting; and, Follow up on participant complaints.

#3) Integrated Investment Policy Statement – While the DOL does not require a plan to have a written investment policy statement, the DOL does state “The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA section 404(a)(1)(A) and (B).” Once plan trustees adopt an investment policy statement, it becomes a legal guideline for the plan. Therefore, it is critical the investment policy statement be drafted in a manner that integrates it fully into the existing documentation of the plan. Too often, the plan adopts an off-the-shelf investment policy statement provided by a vendor. Ironically, adopting such investment policy statements may actually increase fiduciary liability.

#4) Investment Due Diligence – Even if a 401k plan satisfies the diversification requirements of 404(c), the DOL still hold the plan fiduciary responsible for monitoring and selecting those investments. If one exists, the investment policy statement provides a clear roadmap for the 401k fiduciary to follow regarding the selection and monitoring of investments. In addition, regular due diligence reports must be consistent with this roadmap. With a clearly written roadmap, the 401k fiduciary can reduce fiduciary liability. Without a clearly written roadmap, it may be difficult for the ERISA fiduciary to successfully defend investment due diligence actions during a DOL audit.

#5) Trustee & Employee Education – Section 404(c) does not require employers to offer employee education. According to the DOL, if an employer or vendor merely provides general financial and investment education, then it is not acting as a fiduciary. On the other hand, if the employer hires a professional investment adviser to provide individual advice to employees, both the selection of that vendor and the vendor itself takes on fiduciary liability. This vendor selection falls under the same issues as #2 above, especially the conflicts of issues concerns.

This short article can come nowhere near the comprehensiveness required for an effective plan fiduciary diagnostic test. This kind of test goes far beyond the independent audit requirements of larger plans. The 401k fiduciary can delegate this testing to a competent independent fiduciary consultant.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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