A recent Supreme Court decision highlights the importance for plan fiduciaries to follow ERISA’s duty of prudence. Allegations in the case against Northwestern University’s fiduciary committee include several violations that may be commonly overlooked when managing a defined contribution plan and reviewing the health of the investments included.
According to the Department of Labor, plan fiduciaries have the following responsibilities:
- Run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.
- To act prudently and diversify the plan’s investments in order to minimize the risk of large losses.
- Follow the terms of plan documents to the extent that the plan terms are consistent with ERISA.
- Avoid conflicts of interest by not engaging in transactions on behalf of the plan that benefit parties related to the plan, such as fiduciaries, service providers, or the plan sponsor.
The main points in this case focus on the plan fiduciaries maintaining an excessive number of investment options on the plan menu, allowing plan record keepers to include proprietary products in the plan mix, and continuing to offer investment options that were high-cost and underperforming. While this last item may appear in short-term evaluations, if investments of this nature are not monitored and addressed over time, it may lead to a violation of the law of prudence for not removing the option from the plan menu.
While including a large number of options may initially appear to provide variety and diversity, excessive options can make it difficult to effectively monitor their performance. Participation in each option can be diluted and overlooked when determining the impact poor performance may have on participants or the plan as a whole. It can also make it difficult for plan participants to understand the difference between options, leading to less informed choices.
A plan’s fiduciary committee should also establish a set of guidelines from which to evaluate the plan’s performance and management. Among items to include is a review of the fees associated with the funds. Understanding what is typical for administrative fees will help ensure that more of the participants’ money goes toward investing rather than administration. A biannual review and request for proposal from other plan sponsors may help monitor these fees and can also help provide a bargaining chip with the current provider if all other service points are satisfactory.
Many employers work with a financial advisor that can help in assessing plan administrators and plan performance and can assist fiduciaries with monitoring the plan for compliance. An attorney may also be able to provide guidance in assessing areas that may not be in line with ERISA’s requirements.
