Many plan sponsors don’t realize they are fiduciaries. Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of retirement-plan participants and their beneficiaries. The most important responsibilities include, but are not limited to, drafting an investment policy statement, selecting the funds that will make up the investment menu and providing education to the participants.
Here’s an example of a plan sponsor that is out of compliance and hence subject to penalties and other liability:
It’s 1990, and a small-business owner is told by his accountant that he and his employees need some type of qualified plan for their savings vehicle. The owner whips together a basic plan with little instruction, throws some investment options in there based on some chatter at a cocktail party and basically sets and forgets it.
Little education is provided to the employees after the establishment of the plan. Paperwork for new hires is handled by an employee not hired for such service. Fast-forward 20-plus years, and the plan is using the same basic funds and investment menu that was provided over two decades ago. Those funds may not be appropriate anymore. They might have large fees. They may have horrible past performance. Furthermore, the menu may not provide appropriate diversified choices.
For example, for equity funds, there should at least be an option for large-cap, mid-cap, small-cap, international and emerging markets. In fixed income, there should be choices such as short-term bonds, international bonds, high-yield bonds, etc. There should be active and passive options available. Passive options are a good way to keep costs down. Furthermore, the employees still aren’t getting any education or instruction on how to invest, how much to invest, etc.