“Fee-fi-fo-fum!” roars the giant.
You may not be afraid of giants or believe in fairy tales anymore, but that phrase still holds plenty of lessons if you serve as a fiduciary to your employees’ retirement plan. And, if you slip up on your fiduciary role, you may have plenty to fear!
So, what does “fee-fi-fo-fum” have to do with retirement plans? Read on…
Fee
Fee-s are incurred by all retirement plans; after all, someone needs to do administration, record-keeping and fund selection. However, fees have a way of getting plan sponsors into trouble if they’re unreasonable.
Case in point: In February 2015, Lockheed Martin Corp. agreed to settle a lawsuit with employees and retirees who claimed the company invested their 401(k) savings in funds with excessive fees. That settlement set them back $62 million.
As a fiduciary, how do you know if your service providers are collecting golden eggs from your retirement plan? Bids and RFPs are a first line of defense in making such assessments. InvestmentNews quotes Jerry Schlichter, who represented the litigants in the Lockheed Martin case, “If sponsors don’t get bids, it raises the question of whether fees are reasonable.” If they aren’t, you could be at risk.
Excessive fees are a major concern. For tips on knowing if your plan’s fees fall within the norm, review the Department of Labor (DOL) booklet, Understanding Retirement Plan Fees and Expenses.
Fi
Fi-duciary responsibilities are critical to the DOL and they highlight their expectations in the guide, Meeting Your Fiduciary Responsibilities.
So what’s a fiduciary? In a nutshell, fiduciary duty is a legal duty to act solely in another party’s interest. Parties (plan sponsors) owning this duty are called fiduciaries. The individuals to whom this duty is owed are called principals (plan participants).
The important thing to remember about your fiduciary responsibility: Process is everything, which leads us to the next point:
Fo
Fo-rmalize your decision-making process from soup to nuts (or should I say beans?). When the DOL audits a plan, it typically looks to see how the plan fiduciaries went about making decisions, how well they documented that process, and how thoroughly they tracked results against their plan’s stated goals.
This issue has hit the courts as well, and the judges agree that reasoned decision-making is a plan’s best defense against monetary liability. In a PlanSponsor.com article on Tatum, et. al., v. RJR Pension Inv. Committee, RJR Employee Benefits Committee, R.J. Reynolds Tobacco Holdings Inc., R.J. Reynolds Tobacco Co., author Karen Wittwer observed:
The court’s stress on reasoned decision-making to judge fiduciaries’ objective prudence in such cases should allay some plan sponsor concerns. “If a fiduciary undertakes a reasoned decision-making process,” the court wrote, “it need never fear monetary liability for an investment decision it determines to be in the beneficiaries’ best interest.”
At Safe Harbor Partners, we call this establishing a ‘process of prudence’ and it’s in your best interest to ensure your company has such a process in place. A thoughtful process of prudence covers all eight criteria for a successful plan, as well as a review of all requirements via an Annual Fiduciary Checklist.
Fum
You may Fum-ble if you don’t cross and dot your fiduciary T’s and I’s. There are many ways to avoid having a giant bureaucracy chasing you down a beanstalk. Nearly all of those ways have something in common – they help prevent a breach of fiduciary responsibility.
Why do we even have to worry about the Fee, the Fi and the Fo? The reason is this – these plans are essential to all of us for funding long-term retirement, but the stakes are high. A November 2014 study by Center for Retirement Research at Boston College found that half of today’s working households will not be able to maintain their pre-retirement standard of living.
So, remember, Fee-Fi-Fo-Fum…
- Fee – Fees that are reasonable
- Fi – Fiduciary responsibilities must be met
- Fo – Formalize a process of prudence
- Fum – Avoid the fiduciary fumble
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