Many 401(k) plan sponsors have wisely selected investment professionals to assist in selecting the plan’s investment menu, typically a listing of various mutual funds. Other plan sponsors may allocate this duty to company officers and other key employees.
In either case, the resident plan fiduciaries (the company officers and key employees who act on behalf of the sponsor as plan administrator or trustee) have a legal duty to “select and monitor” plan investments and, in the case of sponsors who have hired investment professionals – to monitor not only investment performance but also the performance of the investment professionals.
So, how do you “select and monitor?”
There’s only one hard and fast rule: document what your investment-related decisions are and how you made them. But here are some guidelines on how to proceed:
Selection
- Investigate available investment providers. This may include banks, insurance companies, stockbrokers and mutual fund companies and their broad array of investment options. Then solicit specific information on several investment programs. This could be done in a standard format such as a request for proposal (RFP).
- Analyze costs and investment characteristics of available investments and select the investment menu that offers diversified investment options at competitive prices. Remember, your plan is not “free” if your participants pay administrative costs through reduced returns on their plan investments. So, get a handle on this kind of indirect compensation (“revenue sharing”) and make sure you take it into account.
Monitoring
- The general requirement is endorsed by the Supreme Court in the Tibble opinion as a “separate” duty of a trustee to “monitor trust investments and remove imprudent ones.” You should review investment results on a periodic basis with a view towards replacing laggards in your plan’s investment array.
- Compare investment results with criteria set out in your plan’s investment policy statement, or IPS (yes, having an IPS is a good idea). Also, document your decision-making process to prove that in-house plan fiduciaries have performed this duty.
TAKEAWAY
Process, process, process! Just going through the procedure suggested above – and providing documentary proof – could satisfy an IRS or Department of Labor inquiry even if your plan has mediocre investment results.
Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, www.BenefitsLawGroupofChicago.com, with additional updates, commentary and analysis on benefits and employment topics.
The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.
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