Spotlight on Fiduciary Responsibility:
The Investment Selection Process
At a time when most 401(k) participants are experiencing significant investment losses, the industry is preparing for what many experts believe will be an inevitable increase in litigation and legislation. The focus is on a plan sponsor's fiduciary responsibility and the role the investment selection process plays.
Do Your Clients Know It's Not Just About the End Result
While participants generally care most about investment performance, plan sponsors and other plan fiduciaries also should care about the process they use when choosing the investments to offer participants. ERISA Section 404(a)(1)(B) does not define fiduciary responsibility in terms of performance results – it defines it in terms of the process: ERISA "requires a fiduciary to act with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person acting in a like capacity and familiar with such matters would use."
How You Can Help Your Clients Limit Their Exposure
Recommending a product provider that follows an unbiased, disciplined approach to select and monitor their investment managers and fund options can help limit your clients' exposure to fiduciary risk. The process should include four basic steps:
- Conduct annual quantitative and qualitative research on a wide range of fund products and management firms.
- Identify and select managers in each asset class that meet established, documented criteria.
- Continually monitor those managers for consistency with the stated investment objectives for the asset class they manage.
- Replace managers that no longer meet investment criteria.
Followed correctly, these steps can help provide some of the key components needed for a sound fiduciary program: consistency, compliance and an "early warning" system for deviations.
Make Sure to Offer an Appropriate Mix of Investment Options
To help plan sponsors determine the number of types of investments to offer participants, Callan Associates, a leading strategic investment consultant, developed a best practice model for defined contribution plans. The model includes four basic principles:
- A formal process is critical.
Regardless of the plan size, participants are served best when plan sponsors follow a diligent, well-documented process. - The number of options should be limited.
When confronted with too many choices, participants may have difficulty selecting among them. A prudent number of options can help participants better determine an appropriate asset allocation strategy. - Asset allocation portfolios (or lifestyle/life cycle funds) should be offered as a separate tier.
Professionally developed, regularly rebalanced (as needed) portfolios can help to deter participants from chasing short-term returns, which makes them an easy choice for participants who don’t want or know how to construct their own portfolios. - Costs must be controlled.
A well-designed investment structure can help to control total plan costs.
For more information on how to assist clients in selecting the investment options for their plans, call your RMS wholesaler.
