Fiduciary Process is Lacking
Tuesday, March 17, 2009 at 6:56PM Josh Itzoe Here's a good article about a recent study that was conducted by Drinker Biddle & Reath, Grant Thornton LLP, and Plan Sponsor Advisors. The confidential survey was conducted online from October 2008 to November 2008, with 275 independent plan sponsors participating and assessed their understanding of investments, fees, administrative and fiduciary practices related to their plans. The survey participants were broken down by number of employees and annual company revenue. Roughly 70% of the companies surveyed had more than 250 employees and 34% had revenues of $250 million and above.
Frankly, the results scare me because they identify serious shortfalls in the fiduciary governance process. Plan sponsors need to realize that sound process is what drives good decision-making and ultimately, successful outcomes. Defining and following a consistent process, gathering the right data, paying attention to meaningful key indicators, and measuring results is the only way a plan can be operated effectively and fulfill its purpose which is providing retirement benefits for participants and beneficiaries. Here's a quick sampling of some of the things from the survey that concern me most:
- 42% of respondents do not keep meeting minutes
- 26% never benchmark their record-keeping fees
- 29% never benchmark their broker/advisor/consultant fees
- 18% don't know whether record-keeping expenses are per-participant or asset-based
- 31% don't know or are unsure of how much their plan is paying to their broker/advisor/consultant
- 22% don't know or are unsure of how much their plan is paying for record-keeping
- 39% don't know or are unsure whether they periodically determine whether the plan's investment options being offered are using an appropriate share class
- 56% of plans that intend to comply with ERISA section 404(c) have not conducted a review to determine if the plan actually is in compliance
- 42% don't know or are unsure whether their default investment qualifies as a Qualified Default Investment Alternative (QDIA) under the Pension Protection Act (PPA)
Based on the corporate demographics of the respondents, I get the sense that the survey focused primarily on mid-to-large plans (what I would define as roughly $50 million and above). I'm going to try to connect with the authors to see if they can give me a better idea of the size plans (in terms of assets) that are represented in the study. My experience is that most plans in the micro and small plan market are in significantly worse shape from a fiduciary oversight perspective than what I read in the study.
IMO, plan fiduciaries have a long way to go and need to WAKE UP and take their responsibilities more seriously. If most companies ran their businesses the way they run their plans they'd be looking for new jobs before too long.
Kudos to the three firms who conducted the survey which you can download a full copy of, here.
Reader Comments (4)
Josh,
I am not surprised by this one bit. This morning Ryan and I spoke to about 80 plan sponsors at a 401k seminar. Ryan asked for a show of hands as to how many had actually calculated their total plan cost. Not a single hand went up. When he asked about how they would go about benchmarking their plans, it was equally quiet. Now the average plan size in this room was probably 10M so it was probably a slightly different demographic than the one represented in that survey. But it was surprising nonetheless. What it says to me is that while a shockingly large amount of large plan sponsors are not engaging in a sound fiduciary process, virtually none of the smaller plan sponsors have a process at all.
Mike
I definitely agree, Mike. I think part of the problem is that most employers put virtually all the expenses into the plan which creates a couple of problems. First, most employers with smaller plans feel very little pain (if any) from a cost standpoint which is why many assume plans are "free". Second, there is no incentive for the employer to identify or reduce costs, identify conflicts, etc. If companies had to pay for their 401(k) plans the way they pay other corporate expenses I can promise you they'd be more vigilant and the system would be more transparent.
Josh, good stuff. It obviously confirms what you and I have been speaking about for months now. Your comments regarding fees being born from plan expenses reminds me of our last conversation regarding calculating the long term cost or 'drag' that occurs when plan fees (aside from expense ratios) are built in or deducted from plan assets. I suspect that the results of this calculation when demonstrated to a plan sponsor who is also a participant would be quite alarming and perhaps may convince them to pay expenses outside of the plan where they could also get a tax deduction. I'm amazed that more Retirement Plan Consultants don't have a strong conversation with plan sponsors regarding this.
thanks for the nice fiduciary info.
http://www.fiduciary.me