![Tips to help DC plan committees mitigate litigation risk](/content/dam/invesco/us/en/images/insights/ARTCL-HRO-erisa-litigation-playbook-tips-to-help.jpg)
Plan governance
ERISA litigation playbook part 1: DC plan governance best practices
DC plan committees can help reduce litigation risk by establishing and following proper plan governance policies and procedures.
Plans are not required to offer investment management services to participants; instead, it could be viewed as a best practice. However, plan committees must engage in prudent processes to select and monitor the investment managers.
A plan committee can limit an investment manager to the plan’s core options or allow the investment manager to include other investments in the managed accounts.
In evaluating investment managers, plan committees should consider their experience, qualifications, registration, and fees. Fees should be similar to those being charged by others for comparable services.
There are several ways to help participants with investing in participant-directed plans, such as 401(k) and 403(b) plans. For example, plan sponsors can offer pre-packaged investment solutions, such as target date funds and balanced funds, provide investment education to participants,1 or fiduciary advice.
There are two types of fiduciary investment advice for participants — nondiscretionary and discretionary. With nondiscretionary advice, the adviser makes recommendations to participants, who can accept or reject the recommendations. With discretionary advice, or “management,” the adviser makes the investment decisions for the participant’s account; that is, the adviser manages the investments in the account. Each option requires fiduciary oversight by the plan sponsor or plan committee.
There’s no requirement that plan committees provide investment management services to participants.2 If a plan committee decides to offer the service, it would be based on the desire of the members to help participants. In that regard, it’s a best practice.
When offered, an investment management service could benefit participants who elect to use the service, be used as a qualified default investment alternative (QDIA), or both. For electing and defaulted participants, the investment manager would typically obtain information from the plan’s recordkeeper to personalize the investment strategy. Also, the manager could consider any other retirement plans sponsored by the plan sponsor, for example, a defined benefit pension plan.
Most often, a plan committee will want the investment manager to use the plan’s core lineup, called “designated investment alternatives” or “DIAs” in Department of Labor (DOL) regulations. That is because plan committees, in their roles as fiduciaries, put in considerable effort, including the services of investment consultants, to select well-managed and reasonably priced investments for their plans.
When using managed accounts as a default option, fiduciaries should consider whether they provide significant value to younger workers, as they’re often lower paid with lower account balances.
However, a committee could allow the investment manager to use investments that are not in the plan’s lineup. That might occur, for example, where the manager felt that there could be added value by including asset classes (e.g., commodities or real estate) that were not included in the core lineup.
As with any service provider, plan committees must prudently select and monitor investment managers for participant accounts. When selecting a participant-managed account provider, plan committees should consider such factors as the provider’s experience and qualifications, fees, and conflicts of interest.
The DOL’s monitoring guidance requires that (i) the plan committee review the initial selection information to ensure that it remains the same or that any changes don’t warrant termination of the relationship and that (ii) the committee examine compliance with the terms of the arrangement and take into account any participant complaints.
Learn more about offering investment management services to plan participants and evaluating and monitoring managed account providers.
See, for example, US Department of Labor Interpretive Bulletin 96-1.
See subsection (c)(4) of DOL Regulation 29 CFR §2550.404c-1, ERISA section 404© plans.
ERISA litigation playbook part 1: DC plan governance best practices
DC plan committees can help reduce litigation risk by establishing and following proper plan governance policies and procedures.
Making retirement income work part 2: Following a fiduciary process
Fred Reish covers the fiduciary process and best practices around in-plan retirement income solutions.
Making retirement income work part 1: Making decisions
Fred Reish discusses three steps committees should take when adding retirement income options to their DC plans.
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This article is provided for educational and informational purposes only and is not an offer of investment advice or financial products. This is not intended to be legal or tax advice or to offer a comprehensive resource for tax-qualified retirement plans.
The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
A target date fund identifies a specific time at which investors are expected to begin making withdrawals, e.g., now, 2020, 2030. The principal value of the fund is not guaranteed at any time, including at the target date.
Invesco is not affiliated with Faegre Drinker Biddle & Reath LLP.
Reprinted with permission from Fred Reish. While Invesco believes the information presented in this article to be reliable and current, Invesco was not involved in writing the article and cannot guarantee its accuracy. This article is provided for educational and informational purposes only and is not an offer of investment advice or financial products.
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