No one expects their company to run on autopilot, and no one should expect their retirement plan investments to monitor themselves either. As a plan fiduciary, you have an ongoing duty to monitor your investments with the same care you used to select them — as measured by ERISA's "prudent man" definition1. You are an expert, of course, in the running of your company, that's what you do. But, unless you're an investment professional, you're probably not an expert in the field of investments.
As we discussed in the Investment Selection Process article earlier, you might be qualified enough to monitor your own personal investments. And perhaps you do. But when you are dealing with other peoples' money, when your employees' financial futures are at stake, and when you are legally responsible as a fiduciary, you are held to a higher standard under the law.
And you can expect your decisions to be second guessed. Plan participants are no longer passive observers with a few thousand dollars in their retirement plans. That might have been the case twenty years ago, when most peoples' retirement depended on the accrued value of their house. Today, most people have a huge financial stake in their retirement fund accounts. They're depending on sustained and increasing valuation, and they are quite aware of the financial calamities that befell innocent retirement plan participants as a result of some of the scandals of the recent past. Plan participants are watching — wary and fearful of future losses — and this puts tremendous pressure on plan sponsors to do the right thing and make the best choices.
In the previous article we talked about the importance of having a sound process in place for selecting investments — your Investment Policy Statement (IPS). Your IPS is both a guide and a record of prudent decision making.
It is also your best protection against any charges of misjudgement in the selection of investments of the plan's assets. Remember, your legal duty as a retirement plan fiduciary is to be able to prove that you used a sound process in performing your obligations to set up and administer the plan and provide for the investment of its assets. To protect yourself, you must document the decision making process to show how you made your choices based on objective information.
So how do you accomplish this feat? It's no easy task, especially if you're running a business and you don't have credentials as an investment expert. Besides the pressure to make the right decisions for the good of your employees, you have to bear in mind the need to protect yourself from possible lawsuits. And if you need help, remember, the law holds you responsible for choosing the right advisors. If you choose a service provider who gives you biased advice or provides a biased menu of investments, you may not be able to plead ignorance; it may not wash as a defense under federal retirement laws.
Does your service provider "manufacture" (i.e., offers its own brandname investment funds) any investment "products"? If so, their investment selection and monitoring advice might not be completely objective. Does your service provider document the criteria used in choosing their investment universe? As we discussed in an early article, documentation is a vital part of an airtight IPS. And last, but not least, does your service provider support you in carrying out your fiduciary duties once your investment selections have been made?As part of your duties as a fiduciary, the law expects you to review investments on a regular basis. As a best practice, this generally means tracking investment performance against well-defined monitoring criteria at least annually. By tracking each fund's information regularly, you can ensure that each fund remains true to the purpose for which it is intended. By meeting periodically to discuss investments and keeping notes, you demonstrate commitment to a procedurally due diligent process. Over time, you may have to replace a fund that consistently fails to meet the minimum criteria for continued inclusion in the plan. Or, there may be a one-time event that forces you to take action. Either way,, monitoring investments is a necessary and essential part of discharging your fiduciary responsibilities.
It's a lot of work. Most companies do not have the resources to efficiently accomplish investment monitoring in-house. This is why I regularly recommend ADP for on-going investment monitoring. ADP meets my two "bottom-line" criteria with flying colors; First, they do not "manufacture" any investment product, potentially leading to conflict(s) of interest coloring investment recommendations. Second, ADP provides clients with a clear, extensively documented, record of a due diligence process to back up investment selection and monitoring processes. As I've said before, and it cannot be said too many times, your protection as a fiduciary lies in a well thought out and well documented process.
ADP provides every client with a sample investment policy statement which they can easily customize and make their own. Moreover, ADP uses the same IPS for its own investment selection and monitoring process and every quarter ADP reviews each fund's performance in light of its ongoing monitoring criteria. If a fund doesn't meet the criteria set forth in ADP's investment policy statement, the fund is placed on "watch" status. And if the poor performance continues, the fund is removed from ADP's list of funds made available to future clients. ADP also notifies existing clients about the change of status and clients may choose to eliminate the fund from their plan's investment lineup. As a client of ADP, you are kept informed of their monitoring process so you can follow it in your own investment monitoring process.
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