The situation in the stock market has many retirement plan participants feeling anxious about the decreasing values of their
accounts. They are beginning to wonder who is to blame. Is it Wall Street? Is it Main Street? Or, is it the retirement plan’s
trustee or other fiduciaries?
Recent court rulings have set the precedent and reinforced a participant’s right to sue plan sponsors under ERISA — even
in the case of a terminated plan.
Never before did an individual have the ability to sue a plan trustee when a breach of duty resulted in a decrease of a participant’s
balance. Times have changed and now plan trustees must ask themselves, "Am I wiling to take the chair" and defend
my actions, or lack thereof, in a court of law?
These unprecedented times are compelling plan trustees to focus more on their current obligations regarding the investment
offerings and other issues surrounding the plan. Knowing where to begin and what to concentrate on will help make the process
A plan trustee’s duty to monitor the entire plan is paramount. A good place to start is an investment review of the current
investment offerings held inside the plan. How have your investment options performed relative to their respective peer groups?
Even though your mutual fund offerings are substantially down since the beginning of the year, or even in the last month,
how are they performing compared to other funds with the same characteristics and risk tolerance?
Retaining an independent third-party investment adviser can assist you in this endeavor.
Another factor to consider is the overall cost of the plan. Total expenses of the plan include the internal mutual fund expenses,
record-keeping and administration expenses, investment adviser compensation, and possibly, additional charges on plan assets.
Pending legislation will mandate, in the very near future, that every party receiving compensation from the plan assets has
a written service agreement in place with the plan. It is imperative that plan trustees know and be able to identify all of
the costs associated with the plan, and that participants are receiving value for the costs associated with their assets.
As a plan trustee, you have many safe harbor options available to you to greatly reduce your potential liabilities.
The Pension Protection Act, or PPA, of 2006, all 900-plus pages of it, provides specific regulations, which if followed, will
provide a fiduciary defense and protection of your decisions.
The PPA is one of the single most important pieces of legislation issued since the enactment of ERISA in 1974. Yet, many Trustees
have yet to adopt all or some of its provisions.
One provision allows the fiduciaries of the plan to invest the assets of a participant, in the absence of any investment direction
provided by the participant, into a qualified default investment alternative, or QDIA.
QDIAs must either be a life-cycle or targeted-retirement-date fund, a balance fund, or a professionally managed account. The
days of having a stable value or Money Market account as the default option are no longer allowed.
Another provision in the PPA relates to the ability of participants to consult with an independent professional financial
adviser through their plan. PPA fiduciary advisers can enter into an investment advice arrangement which provides participants
with personalized advice-again, a safe harbor allowed under the PPA Act of 2006.
Today, many participants have questions and concerns on how the current credit and financial crisis will affect their retirement
Participants nearing retirement age with larger account balances are expressing an even heightened level of concern. During
times like these, frequent communication is needed to help participants reduce their anxiety regarding the decline in their
They need to be reminded about the importance of diversification, the value of long-term investing and the benefits of regular
Warren Buffet once said "Great investment opportunities come around when excellent companies are surrounded by unusual
circumstances that cause the stock to be misappraised."
Market cycles depend as much on market fundamentals as they do on people’s emotion. Making investment decisions based upon
emotional reasons, instead of sound analytical ones, can lead to costly mistakes. Providing participants with ongoing education
will help them overcome their fears.
From the plan trustee’s perspective, it is imperative to have systematic, documented process.
Create a fiduciary binder and file all quarterly investment reviews and analyses for future reference.
Keep a copy of all education and communication materials provided to participants.
And lastly, remember that every decision you make must have the participants’ best interests in mind.
If the time ever comes when you must "take the chair," you will be able to defend your actions confidently with
the proper documentation.
Wylam is a founding partner with the 401(k) team at Capital Analysts of the Midwest, an Indianapolis-based financial services
firm. Views expressed here are the writer’s.