Plan Monitoring: Basic, but Important Best Practice

Some words can be opposites of themselves. One of them is oversight. It’s a bad thing if it means something that has been missed due to lack of attention. But it’s a good thing if it’s exercised in a way that ensures its negative connotation does not take place. And its positive meaning is at the heart of plan monitoring, which can be a boon for retirement plans.

In “Retirement Plan Best Practices: Plan Monitoring,” Ryan Cunningham, Jillian Perkins and Terri Schwartz, writing for the investment services firm Arnerich Massena, discuss the importance of plan monitoring and offer tips and ideas on designing a process and procedures for monitoring the way a plan and its funds are managed.

Monitoring is an ongoing process, Cunningham, Perkins and Schwartz argue, and requires “dedicated attention and oversight.” But it’s also something more: It’s part of fulfilling fiduciary duty. “Fiduciary liability often comes down to process more than outcome,” they say, adding, “To demonstrate fiduciary prudence, it is critical to document the process you intend to follow as well as the process itself as you conduct it, keeping careful records of decision-making at all stages.”

Cunningham, Perkins and Schwartz focus on four areas as key to effectively conducting plan monitoring.

Reviewing fund lineup performance. This, Cunningham, Perkins and Schwartz say, “is at the top of the list when it comes to monitoring the plan” and “needs to be continually reviewed and evaluated.” But they add that this function also entails looking at more factors than just the raw data regarding fund performance. Cunningham, Perkins and Schwartz suggest a quarterly review, which they contend should include an in-depth look at:

• performance in the short sort and long term, and over full market cycles;

• changes in and with investment managers and their personnel;

• overall investment lineups and investments; and

• fees.

Managing plan providers. Monitoring providers such as plan recordkeepers, plan investment consultants and others who provide services to the plan is part of exercising fiduciary duty, Cunningham, Perkins and Schwartz say. They suggest that a committee conduct an annual review. This, they say, should entail reviewing providers’ contracts, service structure and service provided. To help in doing so, they suggest that the committee consider whether the providers’ services are:

• meeting the needs of the plan and the participants;

• reasonable given the cost of obtaining them; and

• lacking or could be augmented.

Cunningham, Perkins and Schwartz also suggest that a plan may find it helpful to conduct a request for proposal (RFP) or request for information (RFI) periodically; they recommend doing so every three to five years. This, they contend, “has tremendous benefits and demonstrates a high degree of fiduciary prudence” and “can help you determine whether your provider is giving you an optimal level of service for the price being charged and can either validate that your current partner is the best fit or indicate if this is not the case.”

Monitoring and managing plan fees. This function “is a delicate balancing act,” say Cunningham, Perkins and Schwartz, who argue that it is important to be mindful of the maxim “you get what you pay for” and to make sure it is suited to participants, not simply to seek to pay the lowest possible fees. They recommend an in-depth fee review at least once a year, and should include plan, administrative and investment fees.

Benchmarking plan providers. Benchmarking a plan against others of similar size, against the industry in general and against objectives that had been set for the plan itself is one of the best ways to demonstrate fiduciary prudence, say Cunningham, Perkins and Schwartz. The advantages this offers, they suggest, include:

• providing a context against which to evaluate a plan’s design and features;

• highlighting areas that may not measure up and need attention;

• showing how the plan compares against others;

• showing how well the plan is meeting the needs of participants and the employer.

Ongoing Duty

“Building the plan and selecting the investments is not the end of a sponsor’s fiduciary duty,” Cunningham, Perkins and Schwartz remind, noting that “ERISA enjoins plan sponsors with a ‘continuing duty to monitor’ plan investments. “The act of monitoring itself demonstrates a degree of fiduciary prudence when the sponsor follows a well-documented process,” they say.