Checking under the hood of your retirement plan with an objective mechanic
James Sotell, managing director of Comperio Retirement Consulting, shares his perspective on advising small plans and their fiduciaries.
In the rush of everyday business, it’s easy to neglect some of the fiduciary duties involved with sponsoring a retirement plan — particularly for relatively small employers. And when the plan adviser isn’t a retirement plan specialist, sometimes required tasks are left undone. James Sotell, managing director of Comperio Retirement Consulting, a registered investment advisory firm in Cary, North Carolina, is very familiar with this phenomenon. EBN recently spoke to Sotell for his perspective on advising small plans and their fiduciaries. .
Employee Benefit News: Is there any typical reason why plan sponsors are knocking on your door for advice these days?
James Sotell: Sure. For one thing, they’re looking for unbiased advice from a consulting firm that specializes in retirement plans. But more specifically, one reason is all the publicity around litigation involving plan sponsors and accusations that they have been negligent in fulfilling their fiduciary duties. Another is that they have grown large enough, from a few million dollars to the $15-$50 million range with what the markets have done since 2009. I think some of the executives are saying, “Hey, this is a sizable asset. Are we protecting ourselves as an organization? Are we doing what’s best for our participants to make sure that they’re in the best position for retirement?”
EBN: What do you do to size up a plan and look for potential trouble spots?
Sotell: We have a checklist. Many of them, if they hadn’t been working with an advisory firm that specializes in retirement plans, often lack adequate administrative processes and systems for documenting their actions and meetings. Or they don’t have an updated or revised investment policy statement, or
ongoing due diligence and review of their funds tied to their policy statement, or benchmarking investment performance or analysis of their fees to ensure that they’re reasonable for services rendered. EBN: When you find that a sponsor is deficient in those areas, are they surprised, or do they already know it?
Sotell: There’s a combination of both. Some sponsors say, “We have a sense of what we should be doing, but we’re not focused on this. This isn’t our core business, so we’d like to have someone to help us guide through that process.” And there are other plan sponsors that have been so reliant on the advice from either the recordkeeper or maybe a generalist adviser who they think is a fiduciary, but in a lot of cases is not, and they really don’t know. EBN: So in that latter case, the sponsor must suspect the adviser isn’t acting in a fiduciary capacity? Sotell: Well, it’s sort of like a plan sponsor and two people in line and the sponsor says, “Okay, if you’re a fiduciary, step forward.” And the sponsor just stays there, but the recordkeeper and the adviser take a step back, and the sponsor looks to the right and the left and he’s the only one in line, and by default is the fiduciary. EBN: What other issues typically arise when you do a plan check-up? Sotell: The other most typical issue is the fees
they’re paying. Clients don’t fully appreciate or know what all their fees are or how they’re being charged — what is being paid from the funds or the revenue-sharing from the funds. Is that offsetting recordkeeping fees, is it paying recordkeeping fees? Is it paying adviser fees, or both? EBN: Shouldn’t they have that information from the fee disclosure documents they’re getting? Sotell: It may get disclosed to them in some form or fashion once a year, but they don’t see a bill, so they don’t understand the rhyme or reason behind why certain share classes are offered in their plan. They don’t understand that next to the fund name, that if it says “A” versus “R6,” that that denotes right away a difference in fees and revenue-sharing. EBN: When you decipher it for them, does anything surprise them?
Sotell: Something that becomes an “aha moment” is when they understand they may have different revenue-sharing for different funds, and the revenue-sharing on their default fund or a fund with a lot of assets in it could be higher than something with a small amount. Also, with regard to the default or QDIA fund, let’s say it’s a target date fund, sponsors often lack documentation as to why that target date fund was chosen, or just don’t know why, because it was chosen before they got on the retirement committee. The issue is whether it fulfills the requirements of QDIA status. EBN