The classic sports saying of “Defense wins championships” doesn’t apply to workplace retirement plan fiduciaries.
In fact, thinking too defensively could actually have the opposite effect. In a recent conversation with Jamie Fleckner, Partner & ERISA Litigation Chair at Goodwin Law, on the 401(k) Fridays Podcast, he shared “I have seen plaintiffs lawyers argue that if a fiduciary is taking action more out of concern for litigation than out of concern for the well being of participants then that itself constitutes a fiduciary breach.”
In the spirit of keeping your participant’s best interest top of mind, here are three suggestions on where to spend less time on fiduciary defense and transition that energy to offense.
Finding a strategic balance between the two will help your participants advance the ball down the field towards their retirement while still running a strong fiduciary process.
RFP Every Three
With the conviction some cite the need to conduct an RFP for your retirement service providers every three years you would think it was hard-coded into the 401(k) rule book.
Then it must have come from a court ruling in a lawsuit.
According to Fleckner, it actually was the opinion of an expert witness used by the plaintiffs in the George v. Kraft 401(k) case. That’s it.
To date, no court has held that a fiduciary is liable for not conducting an RFP every three years.
With that perspective, if there have not been material changes to the plan or participant demographics what value does the time and effort it takes to conduct a full “RFP Every Three” deliver?
I am not suggesting that you let a bad partnership with a service provider continue longer than it needs too or that if you feel conducting an RFP is in the best interest of your plan and participants that you shouldn’t.
If the motivation is only fiduciary defense, your time is probably better spent elsewhere.
Low Fees Will Set You Free
Opting for low fees in your retirement plan for the sake of reducing fiduciary risk is not a sound strategy and another example of where thinking defensively might not be in the best interest of plan participants.
However, the message many employers have internalized is that low fees are their best chance to avoid a 401(k) lawsuit.
The search for low costs has permeated the ecosystem of retirement service providers. Its hard to argue with the logic that when all things are equal you should a higher price.
However, when evaluating workplace retirement plan products and services things are seldom equal.
Making decisions on fees alone without the context of the value of services received does not align with acting in the best interest of your plan participants.
As I mentioned in a prior post, a singular focus on fees could also hurt participants through introduction of proprietary products, over use of passive investments or turning your participants into prospects. When retirement plan fiduciaries make decisions on fees to reduce their chances of being sued, that hurts everyone.
Nine years into the second longest bull market in the history of U.S. equities, some high-quality investment options are “failing” the evaluation criteria of retirement plan committees. It doesn’t feel good to see plan investments on a “watch list”.
Intuitively, if an investment has a low rating and has been on your watch list for a while the natural inclination is to replace it with one that has a higher rating. Under normal market conditions that makes sense.
But I would argue that today’s market conditions are not normal.
Don't get caught playing fiduciary defense worrying about the appearance of “too many” investments on your watch list.
Take a little extra time when considering investment changes and speak with your investment consultant about the level of risk your current investment has compared to a potential replacement.
Be careful you don’t replace quality long-term investments that have taken less risk during the bull market with ones that have experienced more recent success with higher levels of risk.
Playing More Offense
If you don’t have to spend as much time on fiduciary defense, what else could you be doing? How about playing some offense. Here are a few ideas that could make sense.
Low Return Environment - Several forecasts for major stock and bond indices have modest return projections for the coming decade. As the number of options and the diversification in workplace retirement plans investment menus have declined in recent years, the performance in many plans will be closely tied to what happens in the S&P 500 on the equity side and the Barclays U.S. Aggregate on the fixed income side. Play offense and consider options to supplement your investment line-up to provide meaningful diversification from traditional stock or bond indices. There are several multi-asset alternative options which in a single strategy could provide inflation protection, exposure to non-traditional asset classes and/or a different risk profile than many investments typical found in 401(k) plans.
Income is the Outcome - We know that retirement plan participants are interested in options which provide income in retirement. We also know that employers are interested in exploring income solutions. Yet, few plans offer them today. The conversation has not gotten a lot of traction as many employers feel there is not a clear rule or safe harbor protecting them if they make it available to participants. If you believe your employees would benefit from an option in your retirement plan to provide a consistent stream of income after they stop earning a paycheck, play offense and look into it. With some discussion and diligence, you might find it is not as big of a fiduciary leap as it seems.
Settlor Options - Automatic enrollment, annual automatic contribution increases, match formula, loan programs, distribution options, emergency savings strategies and several other elements that will impact the retirement outcomes of your plan participants are not fiduciary decisions. If you are not confident you are taking advantage of contemporary plan design strategies, play offense and talk to your service partners about how you can use them to improve retirement plan outcomes without making a fiduciary decision.
Fleckner said it very well, with the backdrop of current retirement plan litigation “fiduciaries are less likely to experiment, less likely to take risks, less likely to adopt plan provisions or investments that could benefit participants for fear of the ramifications of doing that.”
The desire to play defense is understandable but doesn’t always limit fiduciary risk or align with the requirement to act in the best interest of plan participants.
Take a minute and think through your fiduciary process.
Are you expending too much time and energy playing defense?
Find a strategic balance between the two.
By doing so you can help your participants advance the ball down the field towards their retirement while still running a strong fiduciary process.