Retirement plan sponsors need to up their compliance game

With all the attention being paid by government agencies, watchdogs and the media to the fiduciary duties of investment managers, it’s little bit of a shock to discover that many retirement plan sponsors are clueless about just what they need to do to make sure they don’t run afoul of the regulations.

But those charged with helping plan sponsors find that to be the case all too many times.

“It’s still somewhat surprising when you meet with plan sponsors and find they are fairly far out of compliance,” said Jon Waite, director of the Investment Management Advisory Team and chief actuary at of SEI, a wealth management company based in Oaks, Pa.

“There are a lot of companies that are inadvertently breaching their fiduciary duty,” Waite said “Hopefully they’ll get in compliance.”

Common areas in which plan sponsors and public pension managers run into trouble involve ethical considerations and not taking a simple step like creating a formal investment document that codifies how assets will be managed and allocated and how success will be measured.

“We’ve found that among audiences we speak with it’s useful to break down fiduciary duties into four major issues,” said Ronald Hagan, chairman of the fiduciary standards committee of Roland Criss, an Arlington, Texas, firm that advises plan sponsors. “[It helps] them get closer to what the Department of Labor is talking about with regards to prudence.”

Those four major areas are governance, controls, administration and investments.

What they have in common is the need for strong leadership and an institutional culture that values things being done properly.

“Plan sponsors are supply chain managers,” Hagan said, something many are just beginning to realize.

Like any other part of a business, the way the retirement system supply chain is managed depends to a great degree on the tone set by company leadership.

“A robust ethics and compliance culture starts at the top,” said Suzanne Dugan leader of the ethics and fiduciary counseling practice of Cohen Milstein based in Washington D.C., “A focus on core values and fiduciary duties is key.”

Dugan, who works mostly with public pension funds but says the lessons also apply to private retirement plans, said every sponsor needs, in effect, a compliance officer.

“Sponsors have to have a resource to go to with questions,” she said.

Being proactive by conducting internal audits and giving employees a place to report potential problems also are important, Dugan said.

Unfortunately, Hagan said, too many plan sponsors rely on their recordkeepers for information on compliance. That, of course, creates a conflict of interest.

For starters, Hagan said he can’t imagine any plan sponsor not having a copy of the FI360 Prudent Practices for Investment Stewards handbook on hand.

That alone won’t be enough, given the complicated regulations and oversight of government agencies. And don’t forget all the baby boomers that are taking more interest in how their retirement savings are invested as they get closer to retirement.

All but the largest companies need outside help to manage a retirement plan, Waite said, considering that in many cases those making pension fund decisions have other company duties.

“Most of these people are dealing with pensions as one aspect of their day,” Waite said of human resources managers, CFOs and other company managers who often serve on retirement plan boards. “All of these people have fulltime jobs. They do things they think are reasonable.”

But getting together only a day or two month makes it difficult for such managers to ensure regulatory compliance.

“It’s become a bigger issue,” Waite added. “I think they need outside advice.”

One area that has drawn increased scrutiny is so-called stock-drop cases in which plans are sued over the inclusion of company stock among assets. One case the industry is watching involves Fifth Third Bancorp. The U.S. Supreme Court has agreed to take the case, which hinges on the question of whether fiduciary duty is breached if the company stock drops in value but is still part of a plan’s portfolio.


And then there are the plan participants, who have begun looking over the shoulders of sponsors. Firms like Fidelity have faced lawsuits over their investment lineups. “Participants are more aware of these issues,” Waite said.  They are asking, ‘Is my company doing everything to keep my money safe.’ ”

Plan participants, aided by government regulations have become more aware of how much of their retirement savings is gobbled up by investment fees. Labor Department’s regulation 408(b)(2), issued two years ago, put such fees on the industry’s front burner.

Along with the disclosure of fees mandated by the regulation, plan sponsors have been surprised with another development, Hagan said.

“One of the unintended consequences of the regulation is that providers are dropping their fees without being asked,” he said.

That has to make plan sponsors wonder why the fees were so high in the first place. As evidence that it has, Hagan said 25 percent of plan sponsors that are part of the Investment Fiduciary Leadership Council said they planned to seek RFPs from vendors this year.

All the media attention and increased scrutiny of regulatory agencies seems to be having an effect on plan sponsors.

“I think they are seeing those articles,” Waite said. “It rings true. They think. ‘Yes we do need to make sure we are compliant.’

“It’s become obvious that hoping for compliance isn’t enough.”

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