In early 2009, credit markets are frozen, equity markets are down, and plan participants are looking for assistance and reassurance about their retirement savings. What concrete steps should a plan fiduciary consider to address these unprecedented economic circumstances at a time when participant-directed retirement savings plans are more important than ever?
The plan sponsor or other named fiduciary of a defined contribution plan generally is responsible for selecting and monitoring the investment options available under the plan. Under the Employee Retirement Income Security Act (ERISA), a plan fiduciary is not a guarantor of positive investment performance. However, ERISA does require a plan fiduciary to follow a prudent process in selecting and monitoring investment options.
Although by March 2009 the Dow Jones Industrial Average had declined more than 50 percent from its record high in October 2007, other indices had performed similarly, and economic fundamentals appeared weak, plan fiduciaries should keep in mind that plan investments generally are designed to be held over the long term. In the meantime, fiduciaries may want to consider some or all of the steps outlined below.
Increase Monitoring on a Temporary Basis
Stepping up normal monitoring procedures on a temporary basis can help plan fiduciaries assess and mitigate risk. Such measures might include:
Reach out to the plan's financial advisors. It may be wise to ask for more current updates on the status of existing investment options, especially if reports are currently provided only annually or semi-annually. Ask the advisor to comment specifically on whether the plan's investments pose any unique concern in the current financial environment.
Review investment policy statements. Review investment policy statements and determine if modifications or temporary exceptions to specific standards are appropriate.
Review and assess the advisors' report and any recommendations received. Evaluate carefully what your financial advisor says. If unique risk factors are identified for your investments, take appropriate action, which, depending on the circumstances, may range from putting the investment on a watch list for close and timely monitoring to freezing the investment to new money, or to eliminating the investment altogether.
Establish an interim accelerated ongoing review process. While many plans currently provide for a quarterly or semiannual review process where plan fiduciaries review performance and other metrics regarding the plan's investments, it may be appropriate to establish a more frequent schedule on a temporary basis.
Document, document, document. ERISA is concerned with fiduciaries following a prudent process, and the best way to demonstrate the existence of such a process is to carefully document your actions and decisions.
Keep Plan Participants Informed
Given uncertainties in the financial markets, participants may appreciate an update about their investments and actions being taken by the plan fiduciary. In developing communications, consider the following:
Provide assurance that events are being monitored. Plan fiduciaries cannot promise that plan investments will not lose value, but they can reassure participants that a monitoring process is in place and is being followed, and that experts who are experienced in investment matters are involved.
Reinforce basic investment principles. Remind participants of the value of diversification and the time horizon for retirement investing. If the plan offers company stock as an investment option, this may be an appropriate time to reinforce previous communications regarding diversification.
Remind participants of available resources. If the plan offers investment advice, remind participants of this valuable benefit. Participants may also want to seek their own financial advice.
Notice of unique risk factors. If unique risk factors with respect to any investment option are identified, that may require tailored communications regarding such factors.
Conclusion
Now more than ever, the role of the plan fiduciary in prudently selecting and monitoring a plan's investment options is critical for participants' long-term retirement savings. The plan fiduciary should also consider its role in the communication of vital information about economic and market developments. A prudent process is essential to risk management—and now is the time to make sure that your process is working appropriately.
