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8 strategies for reducing fiduciary risk in your retirement plan
Following good governance practices can help you reduce your plan’s litigation risk and improve your chances of prevailing in the event of an audit, litigation or regulatory inquiry.
Follow any sort of business news and you’ll hear about the latest ERISA suit brought against an organization’s retirement plan. Those lawsuits show why it’s so vital to have a robust governance structure in place for your retirement plan. Following good governance practices (PDF) can help you reduce your plan’s litigation risk and improve your chances of prevailing in the event of an audit, litigation, or regulatory inquiry.
While there’s no perfect governance structure that works for every retirement plan, there are some risk mitigation strategies you can use to reduce the likelihood of a fiduciary breach. Here are 8 to consider.
1. Establish a retirement plan committee charter
A retirement plan committee charter is a good best practice. The committee can help reduce your fiduciary risk by providing a formal, central framework for making plan decisions. A committee and charter can also help outline duties and actions.
Your retirement plan committee can bring a diverse set of skills and experience, which may lead to better decisions for the plan. Members should be carefully selected and must be capable of performing the necessary duties. Common roles to include among the committee membership are finance, human resources, and legal, though the size and structure of your organization may benefit from a different committee makeup.
2. Maintain a prudent process for selecting and monitoring investments options and document the process
Being able to prove that an organization has followed a prudent process for selecting and monitoring investment options is critical in the event of an audit or inquiry. That’s why it’s so important to document as much as possible. If you have an investment committee, the committee charter statement, meeting minutes and/or notes, and other materials (including an investment policy statement) provide documentation of this prudent process. As part of your prudent process, you should also review the reasonableness of fees and expenses related to the investment options and services provided.
3. Create and follow an investment policy statement
An investment policy statement addresses the prudent process for selecting and monitoring investments, making it a useful resource for plan fiduciaries. Even better, following a comprehensive investment policy statement can significantly reduce fiduciary risk. However, once an investment policy statement is in place, it’s essential that fiduciaries and investment committees follow this document, since a failure to do so could be viewed as a fiduciary breach.
4. ERISA Section 404(c) protection
If you allow participants to select their own investments within your organization’s defined contribution plan, ERISA Section 404(c) protects fiduciaries from being held responsible for poor results due to investment decisions made by participants. If you want your plan to be compliant with ERISA Section 404(c), you’ll need to meet requirements under the regulation and provide participants a notice with the required information. However, even with that protection, plan fiduciaries are still responsible for selecting and monitoring the plan’s investment options.
5. QDIA protection
A qualified default investment alternative (QDIA) protects plan fiduciaries and can reduce plan fiduciary liability due to participants’ investment losses, as long as QDIA requirements are met (such as a notice requirement (PDF) and others).
6. Understand responsibilities and use governing documents
Good governance processes and procedures help reduce the likelihood of a plan straying off course. The governing documents provide the terms to be followed and overall direction for operating the plan. Everyone handling the retirement plan is responsible for understanding the governing documents and ensuring the terms are followed. When a retirement plan doesn’t operate according to its governing documents, it’s commonly viewed as an operational error or fiduciary breach. Examples of key governing documents include:
- Plan document
- Trust instrument
- Charter statements
7. Have a plan design that supports good governance
The retirement plan provisions can be designed to promote good governance. Plan design can be used to promote employees’ saving for retirement while also reducing administrative complexity (which may also reduce costly errors). Examples of plan design options include:
- Using automatic plan features (automatic-enrollment, automatic-escalation, sweep)
- Simplified requirements for defining which employees are eligible to enroll in the retirement plan
- Limiting participants’ access to plan loans
- Providing retirement income options
8. Risk shifting strategies
Risk shifting strategies are available for protecting participants, fiduciaries, and the assets of the retirement plan. ERISA requires that retirement plans maintain a fidelity bond. Other risk shifting strategies, such as fiduciary liability insurance, indemnification of plan fiduciaries, and cyber security insurance, are voluntary.
cyber security insurance, are voluntary. Good governance is a critical part of providing a retirement plan. It not only helps a retirement plan be successful, it also encourages positive outcomes for participants, which is the primary goal of any retirement plan.
We can help
Principal® is committed to helping you and your participants be successful, including providing the fiduciary support you need. Learn more about how to create a sound governance structure in our guide to good governance (PDF).
And if you have any questions about your plan or the guide, please contact your financial professional or Principal representative.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, IA 50392.