With the new year in full swing, you’re likely in the process of building your to-do lists for the year ahead. These quick but often overlooked or deferred items should be at the top of your list. Below, we’ve outlined 6 important but often overlooked procedural prudence tips for plan fiduciaries for 2023.
1. Ensure that your plan design is aligned with its mechanics
As a plan sponsor, you should ensure that all items within your investment plan design are aligned with what your service providers (including payroll providers) are executing. It may sound simple, but often things go unnoticed. For instance, each year, new maximum compensation limits are set (it’s up to $305,000 for 2023). Have you checked to see that your payroll systems are in line with the new limits? It’s surprising how often they aren’t. Stay diligent, and don’t assume that your recordkeeper and payroll provider are always in sync on these issues.
2. Check for conflicts of interest (old and new)
You can learn a lot from the current litigation docket: top advisory firms are getting sued for conflicts of interest in presenting their products to plan sponsors in a way that is confusing their fiduciary status. (Custom target date funds and managed accounts are at the top of the docket.) Have you evaluated your current advisor/consultant for conflicts of interest that may affect your investment program? Now is the time.
Learn more from the SEC’s recent bulletin on standards of conduct for investment advisors’ conflicts of interest here.
3. Review your advisor’s fiduciary liability coverage to make sure it’s adequate for your plan size
Plan litigation is on the rise… and it’s coming down market to smaller and smaller plans. Based on a report by Chubb, excessive fee litigation has dramatically increased in recent years – in 2020, the pace of filings increased more than 4-fold industry-wide. This litigation affects all types of plan sponsors including private companies, nonprofits, and publicly traded companies in all types of industries.
To mitigate risk, review your advisor’s fiduciary liability coverage to ensure it’s adequate for your plan size. This is especially true for larger plans that take on greater risk. For instance, there are a large number of organizations that are insured at $5 million or $10 million dollars, but is this enough for the amount of assets under their firm’s management? Remember, it’s not just your plan that their policy limit covers.
4. Check that your provider is still the same organization they were when they were hired
Many service providers undergo mergers or acquisitions or significantly change their businesses in other ways. This is always a prompt to perform due diligence, or even conduct a comparative search if it’s been a long time since they were hired. Other changes include the retirement of senior staff and/or transition to less experienced professionals. Excessive caseload can be another red flag. Maybe your advisor covered eleven clients when you hired them but now, they oversee twenty, thirty, or even more relationships. Double check the succession plans for organizations that are supporting you and consider an evaluation if major changes have been made.
5. Conduct a year-end review of your advisor, recordkeeper, and other service providers
Finally, we suggest conducting an objective review of all of your service providers. Without the provider in the room, gather your team to discuss costs, services, and satisfaction, and make sure to memorialize this discussion in your meeting minutes. Objective sponsor reviews are a key element of most fiduciary breach cases.
Items for review should include:
- Governance documents including charters, bylaws, Investment Policy Statements, and service agreements. Is everyone doing what they committed to? Are you assuming they are doing something they are not legally responsible for?
- Your satisfaction and areas for improvement
- Cost evaluations. How are you evidencing the reasonableness of those costs?
- Are your service provider’s 408(b)(2) disclosures up to date and accurate? These should include cost and service details. Your receipt of these disclosures requires your affirmative acceptance of their terms.
It is your fiduciary duty to monitor service providers regularly. This applies to all providers including your advisor, actuary, etc. When was the last time you ran an RFP for each? If it’s been 5-7 years or more, it may be time.
6. Board Oversight
If your committee was appointed by an entity (such as a compensation committee) or a specific person (CFO, owner, etc.), have you provided an oversight report to them recently? If not, they may be liable for failure to oversee your appointed duties.