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By Mark Olsen, Managing Director at PlanPILOT

Navigating the complexities of retirement plans requires a skill set that includes vigilance, attention to detail, and expertise. For plan sponsors, the main responsibility is twofold: safeguarding the financial well-being of their participants and adherence to regulatory standards. As the regulatory landscape evolves and the onus of legal compliance intensifies, it’s becoming more clear that it’s easy for a variety of mistakes to be made in the management of a retirement plan.  

To lessen these mistakes and increase overall plan effectiveness, it’s wise to consider adding a dedicated professional to assist with the plan. Enter the ERISA 3(38) investment manager—a specialist equipped to shoulder the weight of investment decisions, responsibilities, and fiduciary compliance. 

In this article, we explore eight compelling reasons to consider integrating a 3(38) investment manager into your retirement plan strategy, demonstrating how such a decision can foster not only compliance and efficiency but also optimal performance for your plan’s beneficiaries.

1. Reduced Liability for Plan Sponsors

When plan sponsors choose to work with a 3(38) investment manager, they delegate the fiduciary duties of managing the investment decisions, significantly reducing their liability. While not all fiduciary responsibilities can be transferred, the critical task of making and monitoring investment decisions can be. This allows sponsors to have greater assurance and shift their focus to other responsibilities such as administrative functions, participant engagement, and overall plan design, with the confidence that the plan’s investments are being managed by specialists who are assuming legal accountability for these decisions.

2. Access to Proficiency

The landscape of retirement plans is both complex and dynamic, requiring specialized knowledge to navigate effectively. A 3(38) investment manager brings not only a wealth of experience but also access to sophisticated analytical tools and resources. This professional skill keeps the plan aligned with the latest best practices and designed to meet both the current and future needs of participants.

3. Efficiency and Time Savings

Investment management is time-consuming, involving constant market analysis, selection of suitable investment vehicles, and ongoing adjustments to align with changing market conditions. By entrusting a 3(38) investment manager with these tasks, plan sponsors can reallocate their time to focus on broader business strategies or other pressing concerns. This partnership fosters a more efficient division of labor, whereby the investment manager handles the minutiae of investment management, and the sponsor leverages time savings for other critical operational areas.

4. Tailored Investment Strategies

Each retirement plan has unique goals based on the demographics of its participants, the company’s financial status, and its long-term objectives. A 3(38) investment manager can create customized investment strategies that account for these factors, aiming for improved financial performance tailored to the specific risk and return profiles needed by the plan. Personalized investment approaches can be the key to realizing specific financial outcomes and seeing the long-term growth of the retirement plan’s assets.

5. Clear Responsibility and Decision-Making

A 3(38) investment manager assumes full discretion over the investment choices of the plan, providing a clear line of responsibility. This distinct demarcation eliminates any confusion over roles and helps to streamline decision-making processes. It simplifies the investment strategy and minimizes the risk of internal conflicts by clearly designating the investment manager as the responsible party for all investment decisions.

6. Regular Monitoring and Reporting

Continuous oversight of investment performance is crucial, and a 3(38) investment manager takes on this responsibility, providing plan sponsors with comprehensive, regular reports on the health of the chosen investments. These reports can include benchmarking investments, reviewing investment policy statements, and reviewing share classes.

7. Cost-Effectiveness

There are fees associated with hiring a 3(38) investment manager, but these are often outweighed by the benefits. Improved investment performance, reduced legal risks, and decreased operational burdens for the plan sponsor can lead to overall cost savings. Additionally, the scale of investments managed by these professionals can lead to reduced costs through institutional pricing and the avoidance of common pitfalls that can be costly for less experienced managers.

8. Enhanced Plan Governance

Finally, the addition of a 3(38) investment manager can significantly strengthen the governance and oversight of a retirement plan. This role brings an extra layer of fiduciary oversight, helping to make all investment decisions with the best interests of participants as the guiding principle.

Take the Next Step: Unlock the Benefits of a 3(38) Investment Manager 

Managing the multifaceted world of plan sponsorship requires skill, foresight, and a deep understanding of industry best practices. If you believe your firm could benefit from additional help, consider hiring a 3(38) investment manager so you are well equipped to tackle these challenges head-on. 

If you think working with a dedicated professional can help you become a better plan sponsor, let’s connect. A partnership with PlanPILOT can be the catalyst you need. Reach out at (312) 973-4913 or get in touch directly via mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

In the world of retirement plans, ensuring favorable outcomes for both sponsors and participants hinges on sidestepping a myriad of potential mistakes. I’ve previously shared my top lessons for retirement plan sponsors, which are certainly important to focus on. Yet it would also be helpful to know not just what we want to do, but what we want to avoid. To aid sponsors in this endeavor, we have crafted a two-part series that examines the most common errors and offers guidance on how to prevent them. 

In this first chapter, we zero in on plan administration, a foundational aspect of orchestrating a successful retirement plan. Taking a proactive and risk-minimized approach to plan administration will serve as a springboard for our next article into the nuances of investments. That said, here are five mistakes I see made frequently with regard to plan administration.

1. Lack of a Diverse Plan Committee

A robust retirement plan starts with a diverse plan committee, encompassing a range of perspectives to foster a holistic strategy that meets the needs of all participants. Unfortunately, many committees fall short, leveraging a narrow viewpoint that fails to resonate with a varied participant base. 

To avoid this pitfall, we advocate for the formation of a committee rich in diversity, tapping into various professional backgrounds, ages, genders, and ethnicities. This approach not only nurtures well-rounded discussions but also facilitates informed, encompassing decisions that cater to a broader spectrum of needs and preferences. 

2. Not Benchmarking and Reviewing Your Plan Every 3-5 Years

In a rapidly evolving financial environment, static strategies often lead to diminished outcomes. A critical yet frequently overlooked practice is the regular benchmarking and reviewing of your retirement plan, ideally every 3-5 years. This process not only helps keep your plan fresh and aligned with current trends but also aids in keeping the fees in check, preventing participants from being overburdened with unnecessary costs. 

Regrettably, it is common to see plans gathering dust, with outdated strategies that no longer serve the best interest of the participants. Stale plans can result in higher fees and potentially lesser returns, impeding the financial growth of the plan’s beneficiaries. 

3. Not Understanding and Explaining Employee Eligibility

One aspect of plan administration that can often be misinterpreted or overlooked is understanding the eligibility criteria for employee participation in retirement plans. Proper comprehension of employee eligibility not only ensures you are in compliance with regulatory mandates but also fosters inclusivity and fairness in the retirement plan you offer. Just as you educate employees about investment options and learning about risk literacy, you should also educate on employee eligibility.

Mistakes in this area can potentially lead to legal ramifications, not to mention dissatisfaction and mistrust among your workforce. It is not uncommon to witness scenarios where inadequate knowledge about employee eligibility results in missed opportunities, hindering employees from reaping the benefits they are entitled to. 

4. Not Having Frequent Committee Meetings and Recording Notes

A well-oiled machine operates smoothly with regular check-ins and adjustments; similarly, a retirement plan thrives on frequent committee meetings where vital decisions are made and strategies are formulated. However, it’s not just the meetings that are crucial; documenting the discussions, decisions, and action plans formulated in these meetings stands equally important. 

Unfortunately, some plan sponsors overlook the need for documentation, creating a void of accountability and potentially fostering environments ripe for inconsistencies and misunderstandings. This not only dampens the effectiveness of the meetings but can also entail legal repercussions.

5. Late Remittance of Employee Deferrals

Timely remittance of employee deferrals is more than a regulatory requirement; it’s a cornerstone of trust and reliability in a retirement plan. Delaying these remittances can not only attract regulatory scrutiny and penalties but also erode the faith employees place in the plan, possibly affecting their financial stability in retirement. 

Ready to Sidestep These Common Mistakes? Let’s Talk.

Navigating the intricacies of plan administration doesn’t have to be a solitary journey. At PlanPILOT, we stand ready to guide you every step of the way, helping you avoid the common pitfalls that can hinder the success of your retirement plan. 

If you’d like to minimize mistakes and maximize your retirement plan, we’d love to help. You can call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

The number of class action 401(k) and 403(b) lawsuits in 2022 was significant, due in part to the U.S. Supreme Court decision vacating a Seventh Circuit decision in early 2022. The decision makes it easier for plaintiff lawsuits to survive motions to dismiss. As a result, in our Year Ahead in Review 2023 article developed last year, we shared that we expect the steady trend of plan monitoring and excessive fees to remain in focus. In this article, we provide actionable insights for plan sponsors to assist in taking steps to help in plan management.

What Can a Plan Sponsor Do to Mitigate Risk? 

We have some ideas…

The idea of litigation is a daunting one. While there is simply no way to insulate your plan from litigation, there are steps plan sponsors can take to mitigate circumstances. Overarchingly, let’s start with the main point: Plan sponsors must be vigilant in their plan oversight. But what does that actually mean? We list specific action items below to help the plan sponsor community be in good stead should litigation arrive at their doorstep.

Critical Plan Oversight Activities 

Document Decisions 

Document, document, document. We see this written and talked about often, but we can’t emphasize enough how documentation can be on your side if done right. Meeting minutes should not be considered a meeting transcript, but it is helpful to approach meeting minutes in a manner that captures the high-level review and decision activities of a meeting. It can also be greatly beneficial to incorporate key rationale. While a dissertation isn’t necessary, insight into the rigor and final decision could go a long way in helping represent the choices made by committees. 

Be Attentive to the Investment Policy Statement (IPS) 

First, while an IPS is not required, it can be informative in helping committees meet plan goals and objectives, as well as support documentation. An IPS should not be a prescriptive document. Rather, it should provide guidance and be written in the context of your plan specifications and oversight objectives. Using rigid language or absolute triggers in an IPS can set committees up for failure and make it challenging for committees to pivot and evolve as appropriate without introducing risk. Using broad language that enables latitude for committees to apply their informed judgment is a valuable approach to help committees shift as necessary and make decisions in the context of the circumstances at hand. Most critical is to ensure that the spirit of the IPS provides guidelines to support the committee in meeting plan objectives. Rigidity is not your friend.

Establish a Monitoring Pattern and Stick to It

Whether it is related to plan fees, investment fees, performance monitoring, or provider monitoring, having a schedule or a checklist that outlines the (general) timeline of monitoring activities and steps the committee takes in monitoring can be a way to not only conduct prudent plan oversight, but in equal form, in the event litigation comes knocking, your committee has a track record to point to showing the diligent work conducted. 

Be Consistent…and When You Aren’t, Document Why

Consistency in plan oversight is key; in fact, repetition can even be helpful as a means of maintaining consistency. (Side note: This doesn’t mean robotically conducting work where an assumption of apathy or lack of engagement could be assumed.) Still, it’s okay to change course. Markets change, plan and participant circumstances evolve, goals and beliefs shift, suitable new products and services come to market, and so on. 

Retirement plan oversight is not a static exercise and it should adapt to changing circumstances. However, it’s important that committees be clear about the drivers of change and ensure that evolution is grounded in sound decision-making connected to the best interest of your participants. And, of course, documentation (see first bullet point) should capture why changes were made.

Investment Beliefs and Understanding Value for Cost

Fees and costs have the attention of everyone—nothing new about that statement—but it should not be a race to the bottom for the cheapest fees (unless the selections suit the plan objectives). 

For example, skilled committees working with their advisors have likely established a point of view between active and passive investment management and use in their plan. Many litigation cases are rooted in casting a single (negative) dye that higher costs are bad, and, in turn, this can result in active investment options in the plan being considered “expensive.” 

However, this is a linear approach to a very complicated topic. One way a plan sponsor can thread this needle is to have their committee establish investment beliefs with their advisor. This helps committees center their decisions pertaining to active and/or passive investment management on what value is received for the services given in connection with their belief set. This turns the linear argument on its head and enables committees to be very clear about how and why they established their preferred choice. Neither active nor passive are right or wrong for everyone; rather, the decision should connect to what the plan sponsor is trying to solve and ensure a commensurate trade of value for cost. Having an evaluated, discussed, and documented view on this topic can go a long way in clarifying and perhaps thoughtfully contesting any litigation matters. 

Define Risk 

We published an article on risk literacy last year, which outlined the various forms of risk most common in defined contribution plans: volatility, downside, inflation, participant behavior, retirement shortfall, and interest rate risk. This topic is a critical one for committees to tackle to help clarify plan objectives that inform their choices. Plan litigation seems to take a linear approach to risk as well. Plan committees that have clarity as to what risks they are trying to solve in order of importance can use that insight to drive their decisions. In turn, this can be documented and help them navigate and explain their choices. 

For example, if a plan sponsor has done the work with their advisor and are most concerned about shortfall risk in retirement for their participants, this may lead them to select a glide path in their plan’s Qualified Default Investment Alternative (QDIA) with higher equity. 

A second example is, if a committee is most concerned about volatility relative to a benchmark, this may lead them to select a passive investment management strategy. There is no single right answer for committees on how to assess and prioritize risk. Rather, the point is to take the time to be clear on developing risk literacy, risk hierarchy for the plan, and letting that drive their decisions, which could go a long way in helping reinforce decisions if litigation appears.

Fiduciary Training and Education

This one can be kept short. Committees are wise to periodically receive ongoing education in plan oversight and specific fiduciary training. This helps keep them up to date on all matters related to plan oversight, litigation trends, and universal understanding among members regarding their fiduciary obligations. This single act can increase awareness and help keep plan decision-making grounded in sound fiduciary principles.

The Bottom Line

While this list is not exhaustive and no plan can be insulated from litigation, we believe it is possible to make the process smoother and maybe even less expensive if your committee takes an opportunity to address the above points. Vigilance is key, and these actions establish documentation, clarity, and informed pursuits.

Want to learn more? Call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

In our previous article, we discussed how retirement plan sponsors could navigate ESG investment options and what the fiduciary responsibilities look like for these types of investments. In this article, we’ll dive deeper into the conversation around ESG investing by discussing the latest guidelines from the U.S. Department of Labor. Read on to learn more about the final regulations and how incorporating ESG factors into your plan will affect your fiduciary responsibility, plan fees, and risk for litigation.

Importance of ESG Guidance

As a refresher, ESG is an investment strategy that depends on a system of ratings in three key areas: environmental, social, and governance. ESG looks at the ethical standards and practices of a company and attempts to understand how those will impact the company’s performance in the stock market. 

Because there is no central uniform body of criteria that scores or indexes companies based on ESG factors, private rating firms develop their own standards. Ratings are typically based on self-reported data from the companies they are grading, which can lead to a general lack of transparency and accuracy, making ESG a complicated investment strategy for fiduciaries.

This is where guidance is needed for plan sponsors seeking to add ESG to their investment offerings. As many sponsors are aware, ERISA imposes multifaceted obligations on plan fiduciaries. There are two key fiduciary responsibilities that impact investment decisions and ESG:

• Fiduciaries are required to act in a prudent way in selecting investments, and
• Fiduciaries must act for the exclusive benefit of providing benefits and paying plan expenses. 

With such important responsibilities that could lead to litigation and fines if not properly upheld, it is crucial that plan sponsors thoroughly understand the rules and regulations around how to incorporate ESG into their plans.

Overview of New Regulations

The final regulations issued by the Department of Labor offer fiduciaries concrete ways to consider ESG factors. First, ESG may be included, where appropriate, as one of the many “financial circumstances and considerations” used by prudent investors in performing a risk-reward assessment. As stated in the new final regulation:

A fiduciary’s determination with respect to an investment or investment course of action must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis, using appropriate investment horizons consistent with the plan’s investment objectives and taking into account the funding policy of the plan established pursuant to section 402(b)(1) of ERISA. Risk and return factors may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action. Whether any particular consideration is a risk-return factor depends on the individual facts and circumstances. The weight given to any factor by a fiduciary should appropriately reflect a reasonable assessment of its impact on risk-return.  

29 C.F.R. Section 2550.404a-1(b)(4) (emphasis added)

Additionally, the final regulations allow fiduciaries to use ESG factors as a “tiebreaker.” As stated in the final regulations:

If a fiduciary prudently concludes that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon, the fiduciary is not prohibited from selecting the investment, or investment course of action, based on collateral benefits other than investment returns. A fiduciary may not, however, accept expected reduced returns or greater risks to secure such additional benefits.     

29. C.F.R. Section 2550.404a-1(c)(2)

Essentially, plan sponsors are allowed to add ESG metrics to their investment decision-making, so long as other factors, namely risk and return, are also properly considered. As long as investments are not chosen solely because of ESG factors, to the detriment of risk and return, the practice will not be considered a breach of fiduciary responsibility.

Role of Participant Preferences

The new regulations also offer guidance on how fiduciaries can respond to participant preferences within ERISA’s fiduciary constraints. Remember: fiduciaries must act for the “exclusive benefit” of providing benefits and paying plan expenses. This requirement can sometimes conflict with what your plan participants want.

Under the final regulations, however, a fiduciary will not violate the ERISA “loyalty” requirement solely because the fiduciary takes into account participant preferences, as long as the fiduciary meets two requirements:

• The fiduciary reflects participant preferences in a way that is consistent with the general fiduciary requirements for using ESG factors. In other words, any ESG investments offered in response to participant preferences must still be based on the fiduciary’s risk-reward analysis applied to any investment (ESG or otherwise).
• Any ESG investment in response to participant preferences must still meet the ERISA prudence requirement.

What Does This Mean for Fiduciaries?

So, what does this mean for plan fiduciaries? Here are a few practical takeaways from the new final regulations:

• The new final regulations do not require that a fiduciary change investment decisions—or how a fiduciary makes its investment decisions.
• Look at ESG as simply one more potential financial factor to consider in assessing an investment. As noted by the DOL, “prudent investors commonly take into account a wide range of financial circumstances and considerations, depending on the particular circumstances.” 
• The framework used by the DOL is anchored in fundamental fiduciary principles—fiduciaries must act with the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.’’  
• The new final regulations are issued in response to the current focus on ESG—but are applicable to other, new investment practices and theories that may emerge.

Do You Have Questions About Adding ESG to Your Retirement Plan?

The final regulations are a step in the right direction for helping plan sponsors navigate the changing landscape around ESG investing, but there are still many factors to consider before updating your investment offering. If you’re a retirement plan sponsor with questions about ESG, or if you would like to learn more about how PlanPILOT’s comprehensive advisory services can benefit you, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.