Menu Monitors

By Fred Reish

In my opinion, most small plan sponsors, and many mid-size sponsors, need help in monitoring their plan investments. While that help can come from a variety of sources, this column looks at the support offered by plan providers, which generally falls into one of three categories:

Co-Fiduciary
In the co-fiduciary model, the provider agrees to serve as an investment fiduciary for the limited purpose of (i) assisting with the monitoring of some or all of the plan investments or (ii) monitoring and changing some or all of the investment managers.

In perhaps the best-known co-fiduciary program, an insurance company agrees to monitor the sub advisors—firms that will make the investment decisions for its “proprietary” mutual funds. The co-fiduciary agrees that it will indemnify the plan sponsor/fiduciary for any damages incurred as a result of successful breach of fiduciary claims based on the quality of the investments.

To the extent that plans select the particular funds covered by that agreement, the primary fiduciaries benefit both from the sophisticated investment monitoring processes of a major financial institution (the provider) and from the indemnification agreement. The indemnification is limited to the specific issue, and plan sponsors still must grapple with other issues, such as the need to offer a broad range of investment that are suitable for the particular group of employees.

Of course, the selection of a co-fiduciary is, itself, a fiduciary act, and the plan sponsor must select and monitor that entity prudently.

Alliance Fiduciary
A second model is for the provider to enter into an arrangement with a Registered Investment Advisor (RIA) to provide plan-level investment advice. In its fullest form, the RIA selects the asset classes appropriate for the employees covered by the plan, recommends several funds in each category, monitors the investments annually, and changes the funds when appropriate. If the plan sponsor accepts and implements the advice exactly as given, the RIA agrees to be the plan’s investment fiduciary.

The upside is that the RIA, generally a well-known advisory firm, takes on much of the decision making (i.e., the sponsor still may select from among the approved funds in each category) and virtually all of the fiduciary responsibility. The plan sponsor also benefits from both the reputation and expertise of the RIA firm. The downside can be the cost, relative to other alternatives.

As with the co-fiduciary arrangement, plan sponsors need to understand which fiduciary responsibility the alliance RIA is taking on and which the sponsor retains, preferably in a written agreement. Also, the plan sponsor must prudently select the RIA and monitor its continuing qualification and performance.

Non-Fiduciary Support
Other providers have decided not to offer fiduciary services, but do offer non-fiduciary support to sponsors. Those providers usually offer a selection of funds that might be described as a preferred or focus list, or might be a contained universe of funds (for example, in a group annuity contract). Either way, the provider engages in a sophisticated and disciplined process to select, monitor, remove, and replace those options—-such that the provider can represent that the investments are appropriate for long-term investing based on prevailing investment industry practices. Properly done, that enables plan sponsors to place considerable reliance on the investment expertise and resources of the provider—-without the provider becoming a fiduciary.

Plan sponsors still must understand the internal processes and expertise of the provider, and cannot rely blindly on general representations. Provider can help by giving the fiduciaries written description of the processes and criteria used and the qualification of the people involved. Then, on a periodic basis—perhaps annually-—the provider should confirm that the process has been followed and either that no material changes have been made in process to personnel, or else document those changes. Armed with that information, the plan sponsor has basis for relying on the non-feudality technical expertise of the provider.

In terms of the three models that offer real support, I believe that they provide meaningful, and perhaps conclusive, legal support in monitoring the individual investments. I leave it to you to decide which best meets the needs of your plan and your employees.

© 2005 Article was reprinted, with permission, from Plan Sponsor magazine (September 2005). Copyright 2005 Asset International, Inc. All rights reserved.

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