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Who’s Minding Your Retirement Plan?

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By Robert Powell

RISMEDIA, April, 2009-(MCT)-In good times, when markets are rising and retirement security is a given, very few workers question or care whether their 401(k) plan’s fiduciary is doing their job or not. But these days, it’s a valid question and concern, especially in light of a distressing survey.

Just 58% of 275 plan sponsors maintain minutes of retirement plan meetings, according to a recent survey conducted by Grant Thornton, an accounting and consulting firm, along with Plan Sponsor Advisors and Drinker Biddle & Reath.

Only 27% of plan sponsors said they use an independent party to analyze plan fees. And a mere 29% say they had established a “clear chain of authority for their plan’s governance committee.”

Given those findings, Grant Thornton said the retirement plans surveyed-and presumably many others-would have a tough time “supporting the prudence of their fiduciary decisions in the face of a Department of Labor audit.”

Plan sponsors must be able to demonstrate how they make decisions and operate their plans in accordance with the law and plan documents, according to Debbie Smith, employee benefits practice partner with Grant Thornton. That’s clearly not the case in many plans.

What’s more, Grant Thornton reports that plan sponsors don’t have an understanding of stable value products, which are offered as the default investments choice in some plans. According to the survey, nearly seven in 10 respondents are “not sure if certain stable value provisions apply to their plans, including market value adjustments, wrap fees and surrender charges for contract termination.”

Not surprisingly, Grant Thornton said plan sponsors need a better understanding of which provisions apply to the stable value investments in their plans. “If a plan sponsor decides to change stable value products and is not aware of their contract provisions, it can impair a smooth and timely transition” a spokesman said in a press release.

If all that wasn’t bad enough news for plan participants, Grant Thornton said a new rule that affects the financial reporting of employee benefit plans has many plan sponsors in a quandary. The new rule-it defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements-is anticipated to have a significant effect on employee benefit plan financial reporting, yet only 53% of the respondents said they are ready to comply with the new requirements.

To be sure, Grant Thornton is in the business of auditing plans and surveys of this sort are designed to drum up business. But the results raise the following questions.

1. Is it possible that retirement plan fiduciaries are not doing their jobs?

“Absolutely,” said Don Trone, founder of Fiduciary Ethos. “It’s not a trend, but a constant. And, it’s not because of malfeasance.”

According to Trone, the reasons fiduciaries are not doing their job are threefold: 1) The vast majority of 401(k) plans are with small businesses, and owners and trustees already have a full plate running the company; 2) ERISA rules are complex, dense, and obtuse-these are rules written by lawyers for lawyers; and 3) the DOL doesn’t provide any investment fiduciary training. Yes, there’s training on plan administration, but not investment training.

2. Is it possible that we may see more 401(k) plan participant lawsuits because of the above?

Yes, Trone said. And others agree.

“Could we see more lawsuits due to the lack of a formalized process in committee?” said Chad Griffeth, accredited investment fiduciary and president of Actium, which offers fiduciary services to companies. “Would such companies be open to more liability for the lack of said formalized process? Absolutely.”

But Trone said the key is whether the courts demand to see evidence of “substantial” compliance or “full” compliance with ERISA. “My bet would be ‘substantial’_that the courts will apply reasonable judgment on the mitigating circumstances,” he said.

3. What about the chain of command for the governance committee?

“Chain of command” is not a commonly used term, Trone said. But in many cases, he said plan documents and the Investment Policy Statement-the statement that outlines how investments will be selected and monitored-are governing documents.

“Between the two, a reasonable person should be able to deduce the chain of command (or) line of authority,” he said. The best plans also use an “appointing letter” from the plan trustees to the investment committee, but this best practice is rare.

4. What should 401(k) plan participants do given that fiduciaries may not be doing their job?

Retirement savers have bigger problems to worry about than the issues described in the survey of plan fiduciaries, Trone said.

“Participants should worry that the government does nothing,” Trone said. “I can’t believe I’m saying that, but the average worker today is facing a retirement crisis.” First, according to Trone, there’s a high probability that Social Security won’t be able to provide retirement benefits. Yes, it will cover widows and orphans, but it may not provide a retirement supplement to a healthy retiree, he said. Second, 401(k) plans can’t carry the load, he said. Performance issues coupled with low contribution limits don’t make for a secure retirement, and that means, according to Trone, the government needs to move to a mandatory retirement system, an auto deduction of 7% from the worker and a required 7% match by employer.

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