The Fiduciary File - Class 308

A 401(k) Fiduciary File is meant to show how your team has arrived at the specific retirement plan you currently offer the participants.  This file would be analogous to “showing your work” when solving a math equation.  In the world of fiduciary law it is just as important to show that you are following the plan’s policies and procedures as it is to have a plan with a strong performance history.  Let’s take a deeper look into the components of a 401(k) Fiduciary File and what materials you might want to include to document your fiduciary process.

The first document I might suggest you save to your fiduciary file is your Investment Policy Statement.  Although we dedicated Class 303 solely to the IPS, this document serves as your playbook for how investment are selected and what criteria is used to remove unsuitable investments from the fund line-up.  It is generally considered a best practice to establish an IPS to lend some structure to your investment selection process.  From a fiduciary standpoint, the only thing worse than not having an Investment Policy Statement is having one and not following its procedures.

We generally suggest that the Investment Committee meets once or twice a year to review the plan’s health.  Although Class 305 is dedicated exclusively to Meeting Minutes, you should know that memorializing these conversations is also considered a fiduciary best practice.  The minutes are meant to document the Investment Committee’s discussions, any motions passed, and all pending actions.  These documents can also serve as a tool for the Investment Committee to track progress on updates to the 401(k) over time.  The minutes are often recorded by the Investment Committee’s secretary or the plan’s advisor.

Investment Committee Meetings often focus on reports and other meeting materials which serve as indicators of the plan’s overall health.  The funds’ performance reports, fee benchmarking reports, annual plan reviews, and participant diagnostic data are often used to determine how the plan is performing, if the plan’s fees are reasonable, and how the participants view the 401(k) Plan.  As the Meeting Minutes will often reference these reports, we generally suggest saving these documents to the fiduciary file as well.

Likewise, any significant actions that take place between Investment Committee Meetings might be uploaded to the Fiduciary File.  For example, we like to provide our clients with a quarterly scoring of their investment line-up.  Even though the committee didn’t formally meet to discuss the investments, showing that the fiduciaries took the time to review the funds’ performances for that quarter would demonstrate that the Investment Committee is tracking the viability of the fund menu between meetings.  Other examples of significant actions might include employee enrollment/education meeting, fund change notifications, and legislative updates.  By documenting these activities, you are memorializing communicating the features of the retirement benefit to the employees.

Finally, we have a few best practice documents you might consider housing in your Fiduciary File.  The Fiduciary Appointment & Acceptance Letter outlines the responsibilities and liabilities of each Investment Committee member.  By signing this letter, each committee member is agreeing to their duties as a fiduciary to the 401(k).  The Investment Committee Bylaws outline how the committee is to be formed, electing officers, and general meeting procedures.  The last form to consider including in the file is your Conflicts of Interest form.  This document discloses if any members of the Investment Committee may be biased against any particular investment analysis due to previous experiences, personal issues, or other factor which may make them partial in evaluating an investment option on behalf of the participants.

I’ve heard that the three most important things in real estate are location, location, and location.  In the world of fiduciary law, I would say the three most important things are documentation, documentation, and documentation.  You might want to maintain the Fiduciary File with the mindset of “If it wasn’t documented, it didn’t happen.”  Join us for next week’s class when we discuss how a 3(21) or 3(38) Advisor can help steer you through the fiduciary process.