Just as most 401k plans are unique in their offerings and operations, so too are the investment committees that should be formed to guide them. However, in confronting the critical issues facing employers in the management of their plans, all employers, and their investment committees should address one key question, if not quarterly, at the very least, annually.
"Is our plan the best it can be?"
Of course, there are several factors to consider in determining whether your plan is the best it can be for your company and its employees. Chief among them are the fund menu, expenses, participant costs, and services, each of which should be thoroughly addressed each year.
Apart from fund selection, which involves an entirely different set of criteria (investment policy statement) the investment committee must follow, ensuring the plan’s fund menu is optimal for the needs of its participants should be a top consideration. Assuming the list is comprised of funds offering sufficient diversification, the key question becomes, “Do we have the right number of funds?” The number of funds offered can pose particular problems for participants who have difficulty in choosing from among a broad range of funds.
Studies indicate that, on average, plan participants tend to hold no more than five funds at one time. So, why would it be necessary to offer 12, 15 or 20 fund options? It’s not unusual for a plan to experience “fund creep” as it adds new funds, while failing to eliminate old funds. Having too many fund options can make it harder for participants to make appropriate investment decisions, and it can drive up plan costs in maintaining them.
If there is just one aspect of plan management that should keep plan sponsors up at night, it should be fund expenses; specifically, whether the fees paid for the funds on the menu are too high as compared with similar funds found on another plan’s menu. The success of the plaintiffs in the recent Tibble v. Edison, case should be a bellwether for investment committees, especially when it is readily apparent that less expensive fund choices are almost always available.
With fee disclosure at the forefront of plan sponsor fiduciary responsibilities, it should be safe to assume that the investment committee is well versed on the significance of fees in calculating plan costs. However, plan sponsors could fall well short of the fiduciary duty if they don’t consider the cost per participant; specifically, the dollar amount each participant is contributing to cover the total cost of the plan. If that figure shows any increase, there may be some serious issues that need to be addressed.
It is one thing to focus on the reasonableness of fees, as plan sponsors should; however, as fiduciaries, plan sponsors must also be able to determine whether the services rendered are reasonable in light of the fees that are paid. That requires a thorough understanding of the specific services that are provided and their associated costs that often translate into the amount of fees charged. Employers and their investment committee should conduct an audit (or have one conducted) of plan services provided to determine their reasonableness based on the value received and a comparison with other plans.
Investment committees are valuable components of an effectively managed plan; however, unless they are consistently focused on the vital issues, they can potentially become a liability to the plan sponsor (who does have personal liability for all decisions). If employers and the members of their committee are not asking the right question (“Is our plan the best it can be?” ), while addressing the key, underlying issues, then you should be asking yourself how good is your 401k plan?