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05.19.21

Small Business (and All Other Plan Sponsors) Oversight of Retirement Plan Investments
Larry A. Ruff

Prudence dictates that qualified plan sponsors periodically re-examine compliance with the fiduciary obligations of their retirement plans. A major area to consider is your fiduciary responsibilities over plan investments. This is essential for all plan sponsors, and in particular, plan sponsors of small businesses that do not have the resources or the time to oversee their plan investments.

Small business oversight

The reality is that many small businesses sponsoring retirement plans do not actively — or infrequently — monitor their plan investments. Some of them do not have an investment advisor, which is to assume someone at the plan sponsor is overseeing the plan’s investments. Others hire an investment advisor who may or may not actively oversee the plan’s investments.

Typically, many small businesses establish a participant-directed investment plan through a third-party administrator (TPA) or a payroll company. When it comes to retirement plans with participant-directed investments, the menu of options is determined when the plan is set up. Experience has shown that these investment options rarely ever change. That may be okay as long as someone is periodically monitoring the investments, but is not okay if this is not happening periodically.

Fiduciary Responsibility

What should small businesses be doing with regards to assessing their plan investments? To guide these small businesses, and all other plan sponsors, a helpful starting point is to first review who the plan fiduciaries are and their responsibilities under ERISA with regard to plan investments:

Plan Fiduciaries
Fiduciaries are generally those individuals or entities who manage an employee benefit plan and its assets. Fiduciary status is based on the functions that the person performs for the plan, not just the person’s title. Discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary.

For a small business, the key fiduciary is frequently the business owner and no one else. Or, it may be the business owner and their financial or business office staff person. In larger organizations, it is usually an employee benefits or investment committee that is composed of five to ten individuals. As you can see, the resources vary considerably based on organization size.

Fiduciary Responsibilities
Fiduciaries are subject to standards of conduct under ERISA because they act on behalf of participants in a retirement plan. Fiduciary responsibilities include:

  • Acting solely in the interest of plan participants;
  • Carrying out their duties prudently;
  • Following the plan documents;
  • Diversifying plan investments; and
  • Paying only reasonable plan expenses.

Each of these responsibilities is either directly or indirectly (like plan documents) related to plan investments. In fact, the duty to act prudently is a central responsibility under ERISA that requires expertise in a variety of areas, such as investments.

Small businesses, in particular, need to evaluate whether these responsibilities are being met.

For instance, small plans may be more likely to pay higher plan administration or investment management fees due to their small number of participants and smaller asset values. Many might pay retail mutual fund prices because of those factors. That is why compliance with fiduciary responsibilities is important for businesses of all sizes, not just small businesses.

Limiting Your Fiduciary Responsibilities
Fiduciaries may limit their liability somewhat by allowing participants to have control over the investments in their accounts. In order to provide participants with control over  their investments, ERISA requires that:

  • Participants must be given the opportunity to choose from a broad range of investment alternatives;
  • There must be at least three different investment options;
  • Participants must be given sufficient information to make informed decisions about the options offered under the plan; and
  • Participants must be allowed to give investment instructions at least once per quarter.

Related Read: Disclosure Obligations of Plan Sponsors

Some small business owners may believe that their plans are on auto-pilot since participants are able to direct their own investments. As such, they may rarely look at or review the plan’s investment performance or fees.

Other small business owners may believe they outsourced these responsibilities to a financial advisor. Even with participant-directed investments, fiduciaries are still responsible for selecting and monitoring the providers of investment options and the options themselves. Remember that the hiring of a service provider is a fiduciary function.

What is a small business to do?

Look at the ERISA fiduciary responsibilities and assess whether they are being fulfilled. You may need to develop a process to have your plan investments reviewed along with a periodic review schedule.

In addition, you may need to hire a financial investment advisor or investment consultant who works with retirement plans and is trained in fiduciary responsibilities under ERISA. Many times, third-party administrators provide their own advisor. That may be acceptable, but it would be more prudent to look for an independent financial advisor or consultant.

Before jumping into this yourself, you might want to consider having an ERISA benefit professional or attorney review your current fiduciary compliance. They could provide you with best practices and suggestions in complying with these duties. They may also be able to provide you or your fiduciaries with fiduciary training.

Related Read: Time for Class: Widening the Scope of Training for Retirement Plan Committee Members

Remember that you have to exercise prudence in all that you do and do it in the best interest of plan participants. Contact your retirement plan professional or ERISA attorney for more information and guidance in assisting you with your fiduciary duties concerning plan investments.

For more information on fiduciary responsibilities, contact Larry Ruff at [email protected] or call him at 312.670.7444.  Visit ORBA.com to learn more about our Employee Benefit Plans Services.

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