Being a retirement plan Fiduciary is an important role and even more so for a nonprofit as they tend to rely more on benefits as a recruitment tool. Nonprofit organizations probably do not have many leaders or employees who are well versed in retirement planning and face added scrutiny on costs, which can impact your ability to obtain advisory support.
As Fiduciary, you must:
- Take actions only in the interests of the benefit of plan participants and beneficiaries
- Act only in ways that benefit the participants and keep costs reasonable
- Be prudent, diligent and skilled at the level of someone reasonably familiar with matters relating to retirement plan oversight
- Adhere to directives contained in the Plan documents and
- Ensure Plan has diversified investment alternatives
Sounds easy enough, but just in case you got through that last section and are satisfied with the “what” of your fiduciary role, but are still a bit vague on the “how,” then here are five best practices to get you started.
5 Tips for a Retirement Plan Fiduciary
Form a Plan Committee
This is a great way to improve the quality of Plan decisions by adding more perspectives, while providing a forum to discuss actions and document decision-making. All members must commit to the same responsibilities and be qualified to participate. When forming the committee, ensure candidates are interested in and are familiar with retirement plans and/or investments.
- The committee should meet regularly to review Plan performance and discuss potential changes, such as investment options.
- Document meetings to demonstrate the decision-making process, any investment performance issues and how you address them.
- Monitor fees related to the Plan and ensures they are in line with comparable benchmarks.
- If the Plan is audited, the auditors should brief the committee, so it can oversee and document actions taken on recommendations or issues.
Procure Qualified Advisory Support
Interpreting Plan documents, investment performance and benchmarking information is a lot of work. In addition, it is nearly impossible for individuals to keep abreast of all the trends and issues associated with retirement plans. For these reasons, it is very important to obtain advisory support.
- The advisor should not be aligned to or associated with Plan investments or administrators.
- Best practice is to hire the advisor for fee so that they are not part of a commission arrangements on the Plan investments.
- The Plan administrator may offer performance data and advice; however, do not rely on them solely, as they are not unbiased.
Engage in and document a formal selection process for your Plan advisor. This will show that you are exercising prudence and diligence on behalf of the Plan. The procurement process provides documentation on the cost reasonableness of the chosen advisor.
Pay Attention to Fees
Fees decrease the value of the participants’ assets, so ensure fees are reasonable and that you have done what you can to minimize the them where possible and prudent. Investments have fees at various levels, typically associated with the overall size of the Plan.
In addition, different types of investment funds have different fee structures.
- Actively managed funds, which buy and sell investments in anticipation of changes in the market, have higher fees.
- Passively managed funds, such as index funds, establish simple investment strategy and sticks with it. These funds have lower fees.
- Regardless of type, the fiduciary must demonstrate that fees are reasonable, done by benchmarking fees from similar funds.
To learn more about active versus passive investments, check out this Bloomberg article.
Educate, Don’t Advise
The fiduciary is responsible for acting on behalf of plan participants and part of that responsibility is educating participants. Help participants understand the Plans, Plan investments and personal retirement planning.
Education does not include making recommendations.
I cannot state this clearer, do not advise! If a participant asks which investments are best, refer them to the Plan performance information or other publicly available information. Do not tell them what you invest in or guide their thinking on investment options. Providing advice can put you and your organization at risk for a lawsuit.
While you cannot tell participants what to invest in, you can and should encourage them to participate in the Plan. The Plan may have a contribution match, which is effectively free money and represents a benefit that your organization maintains as a recruitment tool. Even without a Company match, employee contributions to a retirement plan are tax deferred and they may benefit from lower investment costs .
In addition, retirement planning is an important step that employees need to take to enjoy the retirement they earn after years of dedicated service. Finally, as mentioned before the size of the Plan impacts the fees, so the more participants, the higher the Plan value and the lower the fee rates. It is a win-win-win!
As a retirement plan fiduciary, you have a unique opportunity to help your organization’s employees prepare for the retirement that they deserve. As a member of the nonprofit sector, you likely have a better understanding than most of the importance of independence in retirement. Take the opportunity to serve your employees by following the Plan, acting on their behalf, keeping costs down and providing a diverse mix of good investment options. Educate and encourage employees to participate and did I mention, Don’t Advise!
For more NFP topics, check out the nonprofit leadership blog: Not for Profit Beyond the Numbers
If you have questions or would like a consultation on a nonprofit leadership issue, contact me at: email@example.com
For more about the author, follow this link: Michael F. Cade, CPA, CGMA