The most heavily scrutinized fiduciary duty of a plan sponsor is its role as an Investment Steward, which also extends to members of the plan’s investment committee, trustees, and anyone else who is involved in the oversight of investment decisions for the plan. Understanding the role and all of the requirements attached to it by all of the various regulatory bodies (the S.E.C., the DOL/ERISA, UMPERSA, UPMIFA, etc), is crucial for any plan sponsor that hopes to operate safely and effectively within the bounds of legal and ethical laws and expectations. By adopting best practices, plan sponsors can not only assure that its requirements as an Investment Steward are met; they can ensure the best possible outcome for the plan’s beneficiaries – their employees, whose best interests are paramount in all decisions.
What is exactly is an Investment Steward?
At its core, an Investment Steward is anyone who is connected to the selection, management and monitoring of plan assets, and can include the plan sponsor, trustees, investment committee members, and legal counsel for the plan. Typically, these individuals are not investment professionals unless they are a fiduciary advisor; however one of their principle responsibilities is the selection and oversight of the plan’s investment advisors and managers.
Prudence is the Primary Measure
The standard by which Investment Stewards are measured is their strict adherence to a sound process in assembling, evaluating, and acting upon pertinent and reliable information in a manner that follows widely accepted investment theories. The Investment Steward’s liability is limited when there is clear evidence that procedural prudence was followed in determining the appropriateness of investment options and products selected for plan participants. However, continual due diligence of the plan’s investment portfolio, in terms of its performance, costs, and its appropriateness for plan participants is also required in fulfilling fiduciary responsibilities.
Meeting the test of procedural prudence in the management of investment decisions is challenging, even for experienced investment managers. Investment Stewards, be they plan sponsors, trustees or investment committee members, must rely on a structured set of best practices that fosters shared fiduciary expectations among each other as well as with the plan’s service providers. However, the ultimate fiduciary responsibility of plan prudence will always lie with the plan sponsor.
The Benefits of Best Practices for Investment Stewards
The stakes for plan sponsors are high; however, the benefits of effective and efficient plan implementation can far outweigh the costs; except when fiduciary responsibilities are breached, which can trigger expensive claims and litigation. With a deliberate, structured adherence to best practices for Investment Stewards, plan sponsors can significantly reduce their exposure while increasing the plan’s effectiveness and efficiency. The benefits of fully adopting a best practices framework include:
Risk Mitigation: In plan management, it’s typically not what was done that triggers a claim; it’s invariably something that was not done which can result in a breach of fiduciary duties. Following procedural prudence through a “checklist approach” – much like a pilot’s checklist – ensures that everyone involved stays on the right course.
Sharpening Fiduciary Competence: As part of the evidence of procedural prudence Investment Stewards must demonstrate, they must be able to demonstrate the skills and knowledge required in fulfilling their fiduciary duties, which includes investment awareness and a clear understanding of oversight role in ensuring all parties are working in concert to serve the best interests of their plan participants.
Improved Cost Effectiveness: Successful businesses have clearly demonstrated the effectiveness of following a regimented model built on a framework of best business practices. Plan management is no different, especially when it requires a new or additional set of competencies to achieve success. For any business objective, the shortest route to a successful outcome achieved with optimal cost effectiveness is, by simply implementing proven, best practices and principles.
Whether a plan sponsor is in the startup stage, in the process of reviewing their plan, or approaching a critical juncture of expansion, seeking out and adopting a best practices framework for Investment Stewardship should be paramount in its approach going forward. The time, effort and cost in doing so may seem disproportionate to the benefits at the outset of implementation; however, they are minimal in comparison to the benefits of risk mitigation, mastering fiduciary roles, and plan effectiveness and efficiency in the long run.