Our 2016 white paper, “Managing DC Plan Investments: A Fiduciary Handbook,” was structured to provide guidelines and recommendations for fiduciaries of defined contribution (DC) plans. Below is a summarized and updated version of the document.

Introduction on DC Fiduciary Guide

In the most basic sense, a fiduciary is someone who is acting on the behalf of another person. Retirement plan fiduciaries are essentially acting as the stewards of plan participants’ assets. The governance process is meant to assist the plan sponsor and fiduciaries in overseeing the plan. It provides the structure, authority, and processes for implementing and operating the retirement plan. Effective governance of DC plans helps plan sponsors meet their fiduciary duties, abide by regulatory requirements, and minimize the risk of litigation and negative press. Whatever the approach, the governance structure should address both investment and administrative responsibilities and activities in a way that promotes prudent decision-making and effective oversight without being overly complicated. Importantly, no governance model should be set in stone. Plan sponsors should periodically review the governance model itself, including the roles of all parties. Modifications may be needed if the structure is not effective or efficient.

This summary focuses on the responsibilities and role of ERISA fiduciaries in managing plan investments. Please note, there are other fiduciary obligations that are not covered here: selecting and monitoring service providers, managing plan expenses, and administering the plan, among others. In the ERISA world, fiduciaries must act prudently, solely for participants’ benefit, and according to plan documents. In managing DC plan investments, fiduciaries should consider nine key areas:

1. Evaluate and Update the Investment Structure

Fiduciaries are responsible for structuring a fund menu that allows participants to create diversified portfolios. Considerations include asset classes, default fund options, and minimizing costs. Over time, best practices have shifted from extensive fund choices to streamlined, multi-manager fund strategies.

Action Items:

• Assess updates on DC trends, regulation, and litigation.
• Review plan’s default investment alternatives and fees.
• Examine participant utilization through recordkeeper reports.

2. Draft and Periodically Review the Investment Policy Statement (IPS)

An IPS is a guiding document that outlines the plan’s objectives and the processes for selecting and monitoring funds based on the agreed-upon investment structure. While not legally required, it is highly recommended. Flexibility and regular updates ensure it remains practical and reflective of current committee practices.

Action Items:

• Conduct regular IPS reviews to ensure conformity and practicality.
• Undertake fiduciary training to ensure practices and documentation reflect governance objectives and actual implementation.

3. 404(c) and QDIA Oversight

ERISA 404(c) provides an important protection for plan fiduciaries, limiting potential liability for what may later be determined to be employees’ poor investment choices. Within the 404(c) safe harbor, fiduciaries are further protected in the event a participant doesn’t elect where their assets should be invested, so long as participants’ assets are defaulted into a “qualified default investment alternative” (QDIA). The most common QDIA is a target date fund (TDF), and in order to take advantage of the fiduciary protections, the QDIA must align with the plans’ population. Fiduciaries should monitor aspects like the impact of other employee benefits, equity roll-down rates, glidepaths, fees, and manager performance. Clear communication to participants is essential.

Action Items:

• Periodically review the QDIA structure and implementation.
• Regularly monitor performance.
• Analyze utilization and updates through trust reports.
• Arrange manager presentations to discuss QDIA strategies.

4. Review and Monitor Investment Manager Performance

Fiduciaries should establish and document processes to evaluate fund and manager performance, benchmark comparisons, and cost-effectiveness. The process to review and monitor fund selection and performance should be documented thoroughly.

Action Items:

• Review fund performance and investment markets as set out in the IPS.
• Regularly confirm that the plan is utilizing the lowest cost option.
• If the IPS requires it, the fiduciaries should maintain a watch list for underperforming investments.

5. Monitor and Benchmark Plan Fees

ERISA requires plan fees to be reasonable. Sponsors must regularly review fees and compare them to industry benchmarks. Revenue-sharing arrangements, though less common, require transparency and oversight.

Action Items:

• Obtain and review service provider compensation disclosures.
• Review and document investment vehicles and fee strategies.
• Review the availability and utilization of “float income” generated when assets are not invested.

6. Managed Accounts Evaluation and Monitoring

If the plan offers managed account services to participants, the plan fiduciary should review the methodology, implementation, and outcomes.

Action Items:

• Conduct regular reviews of the product’s utilization, implementation, and revenue.
• Review how the core investments are deployed in the managed account.

7. Oversee Required Employee Communications

Fiduciaries must ensure participants receive clear and accurate disclosures about plan investment options on a timely basis. While education beyond basic plan information isn’t required, many sponsors provide additional investment advice or tools.

Action Items:

• Review service providers’ communications.
• Stay updated on education and advice regulations.

8. Review Overall Plan Utilization

Evaluating participant behavior, such as deferral rates, allocation decisions, and withdrawal patterns, can guide plan improvements. Adjustments to defaults or fund lineups may enhance outcomes.

Action Items:

• Analyze participant behavior through recordkeeper reports.
• Confirm application of plan forfeitures.

9. Review Defined Contribution Trends and Overall Plan Effectiveness

Periodic reviews of plan design and trends can help determine if the plan effectively supports participants’ retirement goals. This includes examining retirement income adequacy projections.

Action Items:

• Review retirement income replacement data.
• Benchmark against industry best practices.

This summary provides fiduciaries with a clear process for managing DC plan investments while ensuring compliance and best practices. For additional details, please refer to the complete handbook at the link below, recognizing that it was updated in 2016 and some of the laws and regulations mentioned in it may have been changed since then.