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5 Risk Management Questions Plan Sponsors Should Ask About Their Retirement Plan

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Ask These Five Questions

Do you know the expenses of your retirement plan and are they competitive?

Most sponsors know the costs associated with their retirement plans for which they write a check, such as costs related to tax filings, recordkeeping, document review and update and for some, audits. However, for most plans the most significant costs are those paid directly by the plan or from the funds, normally defined in basis points, and charged in a way that reduces the participants’ return on their investments. Increasingly, plan sponsors are being held responsible for assuring these costs are reasonable in relation to the services these charges are intended to provide. Knowing your plan costs and determining if these costs are reasonable is a fiduciary duty mandated under title 1 of ERISA.

Do you have a written Investment Policy and is it being followed?

An investment policy is not required under ERISA, however the Department of Labor highly encourages the use of a written investment policy as part of a disciplined investment approach. Many plan sponsors have not documented their investment policy. Even more have not reviewed their original policy for continuing relevance and to determine if actions taken in subsequent periods conform to their policy. We recommend that the Plan Sponsor annually review the policy and compliance with the policy.

Has your asset manager provided you an annual review of all of the investments offered to employees?

Title I of ERISA mandates the management of investments within a retirement plan be consistent with the “Prudent Professional” rule. Consistent with this rule, best practices would include a comparison of existing assets against appropriate benchmarks such as an index or against peers in an asset class, risk adjusted return potential, costs analysis and diversification. Additionally, documenting your review of the analysis provided along with any decisions is important in demonstrating due diligence on your part as the plan sponsor.

Is your employee education sufficient and well-documented?

The number-one complaint employees communicate about their 401(k) is that they don’t understand how to make decisions on investments and terms relevant to them. Employee education must be continuous and tailored to the needs of different groups in the workforce. Age, earning levels, knowledge levels, language and culture are just a few of the issues to consider. Today, many plan sponsors offer employees “one-on-one” investment advising to assist them in their retirement planning. Allowing participants to direct their own investments does not completely remove or mitigate liability from the plan sponsor.

Does your plan and its operation qualify for the safe harbor provisions under ERISA Section 404(c)?

Although the protection under 404(c) is a limited relief, most plans can easily qualify in their plan design and disclosures. Understanding the more than 15 conditions that must be satisfied for 404(c) compliance is critical. We recommend to all of our clients that they document compliance or in the absence of compliance, the exceptions that keep them from qualifying. Careful consideration should be given to correcting any events of noncompliance.

Take Action

Plan sponsors may retain service providers to perform services on their behalf. However, they cannot remove themselves from the ultimate responsibilities and liabilities under ERISA.

AGH offers all of its major corporate clients a “courtesy check-up” for their retirement plans at no cost. Our check-up assists your personnel in answering the five questions above and based on those answers, we can assist them in identifying any major areas of risk associated with your retirement plan.

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Heather Smith
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Heather Smith

Operations Manager
Employee Benefit Services

Heather's prior experience includes banking and trust administration and extensive customer service training. She manages the Employee Benefit Services division and is responsible for all system operations and services. Heather also works on special projects and helps implement new internal procedures. Heather received her QKA certification and is a member of the American Society of Pension Professionals and Actuaries.