Institutional retirement plans play an important role in helping employees save for their future. However, managing these plans comes with significant fiduciary responsibilities.
Plan Sponsors and investment committees must adhere to a structured governance process to ensure they meet their legal and ethical obligations while optimizing plan performance. Establishing and maintaining a well-documented fiduciary governance framework is essential to mitigate risks, enhance transparency, and promote financial wellness for participants.
Fiduciaries of institutional retirement plans are bound by the Employee Retirement Income Security Act of 1974 (ERISA), which sets high standards of conduct. Fiduciaries are responsible for upholding a certain set of duties, failure of which can expose Plan Sponsors to legal repercussions and financial penalties.
These responsibilities include:
Organizations must establish a structured governance process to help effectively fulfill their fiduciary obligations.
The following are seven best practices for designing a robust governance process:
A fiduciary committee should be established to oversee the plan’s administration and investments. This committee should include individuals from various segments of the business, including but not limited to: finance, investments, human resources and legal compliance.
Regular training should be provided to ensure committee members stay informed about evolving fiduciary standards and regulatory changes.
A governance charter outlines the committee’s responsibilities, decision-making processes and accountability structures. This document should include:
The Investment Policy Statement (IPS) serves as a roadmap for managing plan investments. It should define the plan’s investment objectives, asset allocation strategies, risk tolerance and criteria for selecting and monitoring investment options.
Regular reviews of the IPS help ensure it remains aligned with plan goals and regulatory requirements. The IPS should be broad in nature and not outline specific investments or performance criteria.
Fiduciaries must routinely evaluate the plan’s investment options to ensure they meet performance expectations and cost-effectiveness. This includes:
Proper documentation of fiduciary decisions and plan management activities is critical to demonstrating compliance with ERISA requirements. The Department of Labor does not require that you have the best performing or cheapest funds, just that you have documented the reasons why you chose those funds.
Best practices include:
A fiduciary audit helps identify potential weaknesses in plan governance and ensures adherence to best practices. The Department of Labor recommends doing a formal review or Request for Proposal (RFP) every 3-5 years.
Regular audits should cover:
Given the evolving regulatory landscape, fiduciaries must stay informed about new laws, industry trends and best practices. Periodic training sessions, industry conferences and engagement with legal and financial advisors can help fiduciaries maintain a high level of competence.
Establishing a well-defined governance process for institutional retirement plans is a key step in fulfilling fiduciary responsibilities and safeguarding participant interests. Adhering to fiduciary best practices not only ensures compliance but also helps enhance the long-term financial security of plan participants.
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