Plan reviews are an important part of any retirement plan fiduciary’s responsibilities. Not only are they expected by the individuals who have employed the fiduciary, but the actions that must be carried out are highly regulated and require significant documentation.
With more and more advisors being charged with acting in the capacity of a fiduciary, we thought it would be helpful to offer an explanation of what a fiduciary is and what they are responsible for as well as highlighting some tools that are available to help fiduciaries ensure they are performing their job effectively.
Starting at the very beginning, it’s helpful to know the IRS’s definition of a fiduciary and the agency’s interpretation of the responsibilities involved in the role.
In general terms, a fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. For retirement plans, the law defines the actions that result in fiduciary duties and the extent of those duties.
Many of the actions needed to operate a qualified retirement plan involve fiduciary decisions – whether you hire someone to manage the plan for you or do the plan management yourself. Controlling the plan assets or using discretion in managing the plan makes you or the entity you hire a plan fiduciary to the extent of that discretion or control. Fiduciary status is based on the functions performed for the plan, not a title. Be aware that hiring someone to perform fiduciary functions is itself a fiduciary act.
Fiduciary responsibilities cover the process used to carry out the plan functions rather than the results. For example, a plan investment doesn’t have to be a “winner” if it was part of a prudent overall diversified investment portfolio for the plan. Since a Fiduciary needs to carry out activities through a prudent process, you should document your decision-making process to demonstrate the rationale behind the decision at the time it was made.
Documenting your process, and the importance of a plan review
While having an investment policy statement and reviewing the investments on a quarterly basis is very important, so too is reviewing the behavior of the plan, to help implement prudent changes to the plan. Having a plan review on a quarterly basis is advisable, and should be part of a documented process.
The plan review process should include the assessment of several operational aspects of a retirement plan such as eligibility, employee and employer contributions, eligible compensation for respective contributions, and distributions and vesting.
It’s also extremely important to analyzing key behaviors of the plan. So key questions come into focus here. What are the participation rates of the plan? How do they measure against similar plans or an industry benchmark? Or how does the plan rank for your book of business? What can you do to increase participation rates?
There are additional things to consider at this time as well. Adding auto-enrollment features, deploying campaigns to participants to change their behavior, and perhaps adding a company match. Features like these, can keep a plan from failing discrimination testing for HCE’s.
What are the diversification rates of the plan? Many providers come up with a definition of diversification, maybe being invested in more than two asset classes and/or a target date, model portfolio, of lifestyle fund. You can measure the diversification for the plan, and make suggestions for the plan, like adding target dates, or model portfolios. You can also deploy campaigns to encourage the participant to walk through a risk tolerance test and help them understand the importance of diversification.
Understanding what the average deferral rate is for the plan is important. You can use that information to illustrate to participant’s retirement readiness, forecasting based on their balance, salary and deferral rate, what their balance might be at retirement. This information might help you with plan design, adding features like auto-increase or maybe lengthening the matching up to 10% from say up to 5%. Campaigns can also be helpful to increase deferral rates.
All of these considerations are necessary as a fiduciary as it is your fiduciary responsibility to help a prudent person to retire.
Tools to help
Several tools and resources are available to assist in the completion of this review.
The Internal Revenue Service (IRS) has developed checklists based on plan type to allow plan sponsors to perform a quick review for operational compliance. These checklists do not cover all plan requirements, but they provide an easy way to begin a retirement plan checkup.
O’Neil Digital Solutions recognized the intricacies of this complex role and wanted to work to aid those charged with these tasks in performing them efficiently and effectively.
We pride ourselves on database management and rolling up the data out of the recordkeeping system. Our highly-automated pagination system integrates database programming with publishing. Using O’Neil’s system, pages and entire publications are transmitted in electronic format for proofing and end-user distribution.
O’Neil’s highly automated composition system integrates database programming with complex business rules to create thousands of pages a day and assemble materials electronically for personalized communication.
We can receive your data from any source, including XML, mainframe databases, word processing files, etc. We then optimize this data, clean, and perform automated sort and extract programs that repurpose your information into professional looking pages, ready for printing or electronic delivery.
All of these functions can aid a fiduciary in their responsibilities to ensure they are efficient and in compliance with their client’s needs.
To find out more about how O’Neil is working to help streamline and simplify processes for those in the financial industry, visit our website or contact us today and let’s talk about how O’Neil can make your life easier.