Sam Kirby, CFA
Senior Manager | Consulting Research Group
This is the second in a series of articles intended to help higher education plan sponsors and retirement plan committees address their fiduciary responsibilities and the needs of their participants.
The first article in this series, “Change Management: A Framework for Higher Education Retirement Plans,” highlighted the drivers of change for higher education retirement plans. It offered a framework for transforming a retirement plan to meet the needs of plan participants within the current market, administrative, and regulatory environment. This article focuses on a key component of that transformation—creating or adapting a fiduciary process to address the goals of providing an effective retirement program for participants while managing risk to the institution.
While the structure described below stems from the fiduciary responsibilities and definitions we believe are appropriate for plans subjected to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), the basic tenets of good process design and decision making are usually adopted by all parties who are making decisions that impact plan participants—even those who are not subject to ERISA. A sound fiduciary process framework generally takes the form of:
- A committee that has been carefully selected, granted appropriate authority, and charged with the responsibility to make fiduciary decisions in the best interest of plan participants;
- A common understanding of goals, roles, and responsibilities, that creates alignment among the parties involved in the ongoing operation of a retirement plan;
- A guiding document, in the form of an investment policy statement (IPS), that provides direction to these individuals, without hampering their ability to apply judgment;
- An objective method for monitoring the ongoing operation of the plan, to help identify issues that warrant further evaluation and discussion, and;
- A process for capturing and documenting committee decisions and actions.
We will focus on these five elements, and how change management principles can help institutions improve their current practices.
The Retirement Plan Committee
Colleges and universities benefit from having a diverse pool of talented, experienced professionals within their walls. Committees commonly include representatives from:
- Human resources
- Faculty, often from business, economics, or finance departments
- Staff representatives, such as risk management professionals
- Endowment professionals
- Internal legal counsel, typically in an advisory capacity
Along with valuable expertise, these parties also bring their own perspectives to plan-related decisions. The second and third tenets of change management described by change management consultant Jeffrey M. Hiatt (and discussed in our prior article) were:
- Organizational change requires individual change, and
- Organizational outcomes are the collective result of individual change.
Nowhere do these principles apply more than in the workings of an effective committee. For example, a common scenario faced by committees is the need to reduce the array of investment choices available to participants. A finance professor may bring valid evidence for the inclusion of, say, an unhedged global bond fund, on the grounds of diversification and portfolio efficiency. A human resources representative, who interacts with new employees wrestling to make investment decisions, may bring a different view. Meanwhile, a risk management professional concerned about potential losses from specialized or less-diversified options may bring another.
CAPTRUST believes that retirement plan committees should undergo fiduciary training to help members understand their roles, responsibilities, and the risks they face as retirement plan fiduciaries. Beyond the benefits of demonstrating a prudent process, this training establishes a common lens through which to view plan-related decisions. Topics covered in fiduciary training often include:
- Understanding fiduciary roles, duties, and obligations,
- Decision-making processes and responsibilities,
- Risk management best practices, and
- Fiduciary checklists.
After conducting hundreds of fiduciary training sessions, we have seen the coherence of purpose such training can create. Phyllis Klein, Senior Director in CAPTRUST’s Consulting Research Group, explains, “One of the best outcomes of fiduciary training is a level-setting of objectives. I’ve seen committees representing complex organizations facing difficult and often disruptive decisions simplify the path forward, just through the common perspective they gain from a 90-minute fiduciary training session.”
A Common Understanding
The largest shift in the management of college and university retirement plans over the past decade is the role of the institution. In the past, their role included salary reduction agreements and remittance processing. Today, plan fiduciaries face important decisions about the retirement programs they oversee, including:
- Is there a reason to use more than one recordkeeper? Or, should we consolidate vendors?
- What is the best default option for our plan, and how can we best select and document our decision?
- How many and what type of investment options should we offer participants?
- Are plan-related costs reasonable? Are we paying these costs in an appropriate manner?
- How should we fulfill our investment menu from the thousands of mutual fund and annuity account choices available?
- How will we monitor our investment menu over time?
- Is there a way to measure and track the retirement readiness of participants? What actions should we take to improve these measures?
These are complex topics. They are further complicated by their interrelated nature and the administrative constraints faced by plans with individual annuity contracts. The result can be paralyzing. For example, choosing a single target date fund series as the default option can be more difficult for a multiple-recordkeeper plan. Eliminating revenue sharing can be impossible when some providers’ proprietary funds or annuities are not available in zero-revenue share classes. And, efforts to change or level the payment of plan-related fees by participants can be stymied by legacy contract structures.
In the case of college and university retirement plan transformation, desired change can rarely be accomplished with a single set of decisions. However, if the committee agrees to a set of common principles and establishes a five-year vision of how its plan should look, the interim steps can become more manageable.
A Guiding Document
The investment policy statement (IPS) forms the cornerstone of a sound fiduciary process. Klein explains, “The plan's IPS is one of the first items the Department of Labor (DOL) will ask for during an audit. The investigator will review it and compare it to other documentation, such as investment reviews, for compliance. You'll want you to be in a position to explain how you are following it.”
Although ERISA does not require an IPS, the DOL has made clear it views an IPS to be an important element of sound fiduciary oversight. DOL Interpretive Bulletin 08-02 states that “maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA.”
IPS language should strike a balance that provides meaningful guidance to plan fiduciaries without being too mechanical. A too-rigid IPS diminishes the committee’s capacity to apply its judgment and can open the door to later troubles if a prescribed action is not taken.
There are many sources and resources describing the attributes of an effective IPS. Yet, in the rush to comply with the host of recently added requirements, many college and university fiduciaries adopted template IPS documents, perhaps provided by a vendor or geared toward private-sector plans with different operating characteristics. Regardless, an IPS can and should evolve over time. We believe that committees should revisit the IPS on an annual basis to evaluate if any changes are necessary—or if any changes have occurred within the plan that alter the way plan investment-related decisions are made.
An Objective Framework
Assembling and training a diverse committee, assessing the plan’s current state, developing an IPS, and forming a multi-year vision for their retirement plan, may take a year of focused work. This is where expert consultants can provide tremendous assistance; committee members cannot take a year off from their other responsibilities to focus on retirement plan transformation.
As recently highlighted in the Supreme Court’s decision in Tibble v. Edison, even if plan investments were selected years ago, fiduciaries retain an ongoing duty to monitor those investments. We believe the best way to fulfill this responsibility is with a comprehensive monitoring framework that evaluates each plan investment relative to the attributes outlined in the IPS. This approach allows the committee to focus on the investment options that warrant attention without becoming lost in reams of performance data. In addition to focusing committee discussion on the most urgent matters and identifying investment options for further scrutiny (and potentially action), a quarterly monitoring methodology becomes part of the documented record of procedural prudence for managing the plan and its investments.
Documenting a Sound Process
The final element of a sound procedural framework is one that is easily overlooked—documenting the process used and decisions made in the course of fiduciary oversight. In the eyes of the DOL and of the courts, if it isn’t documented, it didn’t happen. Fortunately, good process documentation is easy to achieve.
The cornerstone of best practice documentation is the unglamorous-yet-critical role of meeting minutes or reporting. Meeting minutes can serve as an effective tool for capturing plan-related decisions and outlining future actions. They also serve as a time capsule that captures the context within which those decisions were made. If a decision is later called into question, meeting minutes provide a way to understand the decision-making framework, relevant issues, and process used to reach that decision.
Meeting minutes should concisely cover all the important topics discussed during the meeting. They should document that issues were vetted deliberately and thoroughly, with the assistance of outside expertise and collateral when needed. In addition to meeting minutes, materials that should be maintained within a fiduciary file include:
- Executed plan documents and summary plan descriptions.
- Investment policy statement.
- Form 5500s.
- Quarterly reports from investment consultants, recordkeepers, and other service providers,
- Annual compliance testing information,
- Fee and expense benchmarks,
- Required participant notices and disclosures,
- Investment selection and evaluation materials,
- Qualified default investment alternative evaluation material,
- Fiduciary training materials and checklists, and
- Copies of participant communications.
In addition to the five-point framework described, a sixth element should not be overlooked: engagement of a knowledgeable legal practitioner with experience in a complex and changing legal and regulatory framework particular to your institution. CAPTRUST does not provide legal or tax advice, and partnerships with capable advisors are important for all plan sponsors, especially those embarking on complex transformation.
With defined contribution retirement plans forming the backbone of the U.S. retirement system, it has never been more important to provide participants with the best possible benefit program. This significance brings commensurate risk to plan fiduciaries. When coupled with the complexity of changes that have occurred within the higher education retirement landscape in the last six years, the task of plan transformation can seem daunting.
The key to successful change management is harnessing the talent of people, and as colleges and universities are some of the most human-capital rich organizations in existence, talent is in ample supply. By providing these people with a framework to best manage their fiduciary process that creates understanding, alignment, management tools, and procedural prudence, institutions can cut through complexity to take concrete steps to improve their plans.
 Hiatt, Jeffrey and Creasey, Timothy (2013-08-19). “Change Management: The People Side of Change,” Prosci Learning Center Publications.
 Reish, Fred and Faucher, Joe, “Does ERISA Require An Investment Policy Statement?,” Journal of Pension Benefits, accessed October 28, 2015, available at http://www.drinkerbiddle.com/resources/publications/2002/erisa-investment-policy-statement.
 U.S. Department of Labor, “Interpretive Bulletin Relating to Exercise of Shareholder Rights,” accessed October 28, 2015, available at http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=21630&AgencyId=8&DocumentType=2