Although ERISA doesn’t specifically require retirement plan sponsors to create and adhere to a written Investment Policy Statement, having an outlined statement in place can allow sponsors to efficiently run a plan consistent with ERISA requirements while fulfilling their fiduciary duties. An Investment Policy Statement will be unique for each organization based on the characteristics of the plan, but we have compiled a list of considerations for developing a well-crafted document.
In today’s volatile investing environment, selecting your company’s 401(k) or 403(b) plan investment options on your own can seem like more than a full-time job—not to mention potentially putting your organization at risk of litigation if these investments persistently fall short of their expected returns, have less than competitive fees or can’t be liquidated when employees retire. For many sponsors, shifting the fund selection process to an ERISA 3(38) investment manager can free up time and attention to focus on other aspects of the organization, managing employees, and many tough-to-outsource tasks. We review three key factors for hiring a 3(38) investment manager below.
The Employee Retirement Income Security Act of 1974 (ERISA) sets forth the requirements under which defined contribution plans, such as 401(k)s and 403(b)s, must be managed for the benefit of the plan participants. The catch-word that has been the subject of various lawsuits is fiduciary responsibility. Employers and plan sponsors who have not taken the proper steps to mitigate their liability with respect to the provisions of Section 404(a) of ERISA run the potential for drawn out litigation and the financial risk associated with failing to adhere to the “Prudent Person Rule.” This requirement may cause you to consider whether you wish to continue to assume the role of a Section 3(21) plan fiduciary or outsource investment oversight to a Section 3(38) investment manager.
Research from Northwestern Mutual’s Planning & Progress Study revealed that a solid third of all American adults have less than $5,000 put aside for their golden years. One of the biggest contributing factors to this low retirement savings rate is the lack of financial knowledge and general practice of saving, budgeting and investing. According to the American Psychological Association, money is reported to be a top source of significant stress among Americans. When people struggle to save for short-term emergencies, they’re unlikely to prioritize saving for retirement—which, for many, is an amorphous concept that may be decades away. Without education on how to avoid debt, select investments, or prioritize saving for retirement, employees may feel ill-suited to make their own investment decisions, even when it comes to taking advantage of the employer match. As a result, employers who promote employee financial wellness on a holistic basis are far more likely to see increased participation in workplace benefit programs.
For generations, successful endowments, foundations, and non-profits used in-house chief investment officers (CIOs) to direct their investment programs. But in today’s market, this approach has become challenged by the complexity of available asset solutions and limitations of resources. The Outsourced Chief Investment Officer (“OCIO”) model has become a way of life to many endowments and foundations globally, and many boards have found that outsourcing the CIO role provides them with far more flexibility and a higher level of skill at a lower cost. We have outlined the best practices for conducting an OCIO search.