Avoiding Fiduciary Traps: 8 Tips for DC Plan Sponsors

Defined contribution (DC) plan sponsors often worry about landing in hot water for doing the wrong thing. However, many fiduciary issues crop up because plan sponsors have failed to take action. Here, we list eight potential fiduciary traps and suggest ways to avoid them.

(Estimated reading time: 3 min, 35 sec)

Trap 1: The plan’s recordkeeper calls the shots.

Even amid ongoing uncertainty around the Fiduciary Rule, plan sponsors should commit to evaluating and monitoring their recordkeeper’s approach to adhering to the Rule, including all participant touch points such as the plan website, call center, or other participant communications. .

Trap 2: A haphazard approach to plan fee review.

DC plan fee litigation can be both costly and time consuming. Many of these lawsuits allege DC plan sponsors failed to adequately monitor plan fees, yet fewer than two-thirds (63%) of 401(k) plan sponsors have both calculated and benchmarked plan fees within the past 12 months. Plan sponsors should evaluate investment management and administrative fees at least annually and periodically augment this exercise with a recordkeeper request for information every few years to truly understand whether plan fees remain competitive.

Trap 3: The IPS gets stale.

The DC landscape is constantly changing, and it is important that the plan’s investment policy statement (IPS) keep up, yet only 60% of plan sponsors have reviewed their IPS in the past 12 months, and fewer than half (45%) have reviewed AND updated it. We recommend plan sponsors proactively refresh the IPS to reflect the current state of the plan and the DC environment.

Trap 4: Investment committee members learn as they go.

Plan sponsors list a wide swath of individuals who make the investment and administrative decisions for DC plans. These decisions can be complex and have broad consequences. Fiduciaries are often personally named in lawsuits when their decisions are deemed disloyal or imprudent. Even so, only 37% of plan sponsors list formal fiduciary training as one of the top five measures taken in 2016 to improve their plan’s fiduciary position. We recommend that formal annual fiduciary training be a part of the investment committee agenda. Include training on best practices, regulations, litigation, and DC trends, as well as a refresher on what it means to be a DC plan fiduciary. Separately, new committee members should receive training introducing them to their responsibilities as a plan fiduciary and how to meet those responsibilities.

Trap 5: Fund lineup creep.

When faced with too many choices, DC plan participants become overwhelmed and engage in counterproductive behaviors—like forgoing plan participation altogether or ending up with sub-optimal choices. However, the average number of funds (excluding target date funds) in DC plans is now 14, up from 11 in 2006, according to Callan’s DC Index. Before adding a new fund to the lineup, consider whether it will enhance diversification opportunities, can it be better accessed through a self-directed brokerage window, and whether sponsors should first formally reevaluate the fund lineup and/or introduce multi-manager funds?

Trap 6: View managed account providers as commodities.

Not all managed account services are created equal. Plan sponsors should fully test the managed account service provider’s advice, compare managed account fee schedules, and understand the proportion of fees that could be rebated to the plan’s recordkeeper in support of the service.

Trap 7: No audit of the DC plan’s security protocols.

Respondents to Callan’s 2017 Defined Contribution Trends Survey ranked “auditing security protocols” low on the list of actions taken in the past 12 months to improve the fiduciary position of their DC plan. But a breach can be devastating. The security protections that DC plan providers have in place, the protocols for notification if there is a security breach, and remedies in such an eventuality should all be codified in the plan’s service level agreement.

Trap 8: Sloppy documentation around decision making.

Fundamentally, plan sponsors who do not document their decision making in meeting minutes and other written records provide low-hanging fruit for plaintiffs’ attorneys. We recommend that time be allotted to review all plan documentation, including investment structure, suitability of the QDIA, performance monitoring, fee calculation and benchmarking, and other vendor decisions such as managed account and advice providers.

Fiduciary traps are best avoided by creating a game plan to tackle them one by one during the course of the year. Callan recommends scheduling and addressing them regularly.