Retirement plan sponsors must demonstrate fiduciary responsibility. That is, they must act in the sole interest of plan participants and beneficiaries, invest prudently, and avoid conflicts of interest. The financial security of retirement plan participants requires the proper administration and management of retirement funds.
To make appropriate decisions, plan participants need access to high-quality, non-conflicted advice and information. In defined-contribution (DC) plans, plan participants must decide how to allocate their investments. Incorrect information about plan features can lead to unwise investment choices. For example, one survey found that the majority of investors in target dates funds (TDFs) thought that a TDF provided a guaranteed rate of return.
Decisions made by plan fiduciaries can negatively affect investment returns in both DC and defined-benefit (DB) plans. Excessive fees can drastically reduce the growth of 401(k) plan account balances. However, plan participants tend to be unaware of both the overall size and composition of the fees they pay. The Supreme Court has ruled that plan sponsors, as a part of their fiduciary responsibilities, must ensure that investment options do not have excessive fees.
DB plan fiduciaries could choose to invest plan assets in so-called socially responsible or economically targeted investments that are chosen because of their promotion of social causes (for example, environmental stewardship, human rights, diversity). Choosing such investments for retirement plan assets has the potential to reduce returns, thus conflicting with the sponsor’s fiduciary responsibility to act in the sole interests of plan participants.
Finally, plan management must also consider issues of equity. For example, executives and employees must be treated the same with respect to ownership of employer stock. Another example is making decisions that consider the interests of both people who currently contribute to the plan (that is, “active” participants) and people who are no longer contributing to the plan.
MANAGEMENT AND INVESTMENTS: Policy
Information and advice
Fiduciary responsibility to plan participants must be steadfastly maintained. All people who provide investment-related advice to retirement plans (including but not limited to broker-dealers, consultants, appraisers, and insurers) should be subject to the same fiduciary standard as all other investment managers.
Employees should receive investment advice from a qualified adviser who is not subject to conflicts of interest and will help employees invest and manage their self-directed accounts.Disclosure regulations should be established that make the basic properties and related risks of target dates funds as clear as possible for potential investors.
Plan sponsors and fiduciaries should ensure that individual account fees are reasonable. They should also respect relevant regulations by providing both participants and beneficiaries with a clear and comprehensive statement of the types and amounts of fees and expenses charged to their accounts.
Any socially targeted investments made by retirement plan funds must meet the current, stringent Employee Retirement Income Security Act fiduciary criteria, to ensure the protection of plan participants. Pension fiduciaries must not subordinate the retirement income interests of plan participants and beneficiaries to unrelated objectives. The ERISA fiduciary rule, which prohibits the acceptance of reduced return or greater risk to secure collateral benefits, should not be weakened.When there is potential for conflicts of interest, plan fiduciaries should seek independent advice or step aside from decision-making.
Executives and employees should have the same rights and obligations regarding their employer’s stock.
Because retirement funds benefit both active and inactive plan participants, representatives of both groups should be included in decision-making bodies.