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DC Plan Sponsor Midyear Checkup

As the calendar rolls into midyear, now is a good time to assess the progress of your investment committee goals for 2016. Beyond regular investment performance reviews, there are eight common objectives most defined contribution plan committees should look to accomplish.

Conduct Fiduciary Training: Turnover of members of your investment committee, the outcomes of recent court cases and other industry trends are reasons to refresh the fiduciary basics each year. This can be performed by your consultant, vendor, counsel or a combination thereof.

Re-Ratify Your Investment Policy Statement (IPS) and Committee Charter: Once a year, you should review and re-ratify your IPS and Committee Charter. The results of recent court cases may affect the design of these documents, and thus, reviews should be performed by a competent advisor or attorney and then ratified by your investment committee (and appointing board, depending on your organization type).

Review the Potential Impact of the Upcoming Money Market Reform, effective October 14th 2016, on Your Plan Lineup: Review your plan’s exposure to money market funds, determine if any of your investments may be impacted by the upcoming money market fund reform and memorialize this review in your meeting minutes.

Background: On July 23, 2014, the Securities and Exchange Commission (SEC) reformed the rules governing money market funds. The purpose of these changes are to address the risks of investor runs on money market funds, while preserving their benefits. Plan fiduciaries need to understand the implications of the new fund rule amendments with respect to their specific plan investments. (PEI recently hosted an educational webinar with Fitch Ratings on this subject, with a recording now available for viewing here). Committee’s performing this review may determine a change is warranted, which may then result in the need to conduct a fund search.

Reaffirm Your Fee Philosophy: In addition to benchmarking your plan fees, it’s important to reaffirm your plan’s fee philosophy, document that it is being fulfilled annually and assess if a new fee philosophy should be considered.

The technology of fee application, recordkeeping required revenue and investment management fees are constantly evolving. The enactment of ERISA section 408(b) in 2012 and the results of last year’s U.S. Supreme Court decision in the Tibble v. Edison International case have confirmed that plan fiduciaries have a continuing duty to monitor investments offered under a qualified defined contribution plan. However, many plan sponsors have a false sense of fiduciary security by accepting a “free” push- button fee benchmarking report from an advisor or recordkeeper, and thus, they do not understand the proper process they should be fulfilling.

Review the Investment Lineup: Your plan’s fund menu should be reviewed to ensure the plan offers at least three investment alternatives, each of which is diversified and has materially different risk/return characteristics. Participants should have the ability to minimize the risk of large losses—an easy hurdle for most plans today. However, many plan sponsors are also performing a complete investment menu analysis to benchmark their plan’s offerings by both the number of options and the included asset classes in order to identify areas of overlap (through returns-based and holdings-based style analysis, as example). Such an analysis would educate committee members on investment menu trends, both from industry sources and the perspective of similar sized plans, and should summarize and outline behavioral finance studies that support certain investment menu structures. The results of this review would then offer recommendations and considerations for refining the investment menu, with the goal of improving retirement readiness outcomes for plan participants.

Re-Ratify Your Plan’s Target Date Fund (TDF) Selection: Although most TDFs are Qualified Default Investment Alternatives (QDIAs), which provide fiduciary relief of investment losses, they do not abdicate a committee’s responsibilities in the selection and monitoring of the TDF series. As these funds continue to gain prominence, it is imperative for plan sponsors to have a prudent process in place for their evaluation and selection, and care must be taken to assess the various trade-offs available across TDF offerings. For example, participant demographics and plan sponsor objectives can affect the decision as to which target date fund may be the most appropriate for a particular plan, including whether a custom solution is necessary. Specific TDF factors, such as glide path design, underlying investments, performance and costs, should be evaluated during this process.

Conduct Managed Account Services Due Diligence: Many plan recordkeepers have been encouraging plan sponsors to add managed accounts to their plans over the past few years. However, as with any plan decision, an investment committee should perform proper due diligence regarding the qualifications, experience and process of the managed account offering. Keys to proper due diligence include:
• understanding the basic glide path produced by the managed account provider’s asset allocation methodology,
• understanding the extent to which outside assets and individual risk preferences are considered when developing the asset mix,
• understanding the provider’s preference for active versus passive investments, and
• determining if the managed account provider’s fees and compensation are reasonable in light of the services being rendered.

Review the DOL Conflict of Interest Rule with Your Service Providers: On April 6, 2016, the Department of Labor (DOL) released their final Conflict of Interest (COI) Rule. Plan sponsors should reach out to their providers to determine when they will be releasing guidance on how the new rule could impact their interaction with plan participants. The regulation seeks to require more retirement investment advisors to put their client’s best interest first by expanding on the types of retirement investment advice covered under fiduciary protections. The requirements apply to investment recommendations made to qualified plans, plan participants and IRA owners. Discussions about plan distributions and IRA rollovers are now considered fiduciary advice. Changes were also made to the fiduciary prohibited transaction rules, essentially impacting how advisors will be able to be paid in regards to their recommendations. Compensation will now need to be levelized or will need to meet the conditions of a prohibited transaction exemption. For plan sponsors using consultants from brokerage/wire houses, these relationships should be particularly scrutinized as many of these organization’s business models are built on gaining access to your participants for additional revenue and IRA rollovers. The final rule is generally effective April 10, 2017, but some requirements will not be effective until January 1, 2018. The regulation is over 1,000 pages, and as a result, it is still being reviewed by service providers and their attorneys.

The above goals, as well as other fiduciary decisions you make with your plan, should then be properly memorialized in your committee minutes.