Successful Defined Contribution Investment Design. Gao Ying

asked Levine about the plan design and oversight issues that require fiduciary oversight, including selecting the investment lineup and manager. In the case that the plan sponsor would prefer to outsource these duties, what should they consider? Here’s what he told us:

      The role and responsibilities for each advisor should be clear and documented within a contract and, depending on the exact circumstances, potentially in the plan document as well. In some cases, the administrative and investment issues are split and managed by different advisors. It’s important that both the investment and administrative issues be addressed, and to clarify who is actually administering the plan. Without clarity, all fiduciary responsibility will, under many standardized plan documents, rest with the plan sponsor – that is, the company.

      Within advisor contracts, it’s helpful to identify the exact fiduciary status of the advisor to minimize confusion as to what role the advisor is playing. Of course, each contracting situation is unique, so there is no one-size-fits-all solution.

      As plan sponsors and fiduciaries finalize their agreements with providers, you need to understand if this person is really saying, “I will be named as the main fiduciary in the plan document.” Or are they saying, “I will be your co-fiduciary with you,” which really means, “I’m just a fiduciary with your existing plan fiduciary, so we’re all on the hook together”?

      The bottom line, Levine told us, is that outsourcing many fiduciary duties to a third party is doable, but “it’s important to really dot the is and cross the ts because this is where people may get caught, especially if they only focus on the investments and not on the administration.”

      HOW TO APPROACH OUTSOURCING DC PLAN RESOURCES

      Levine told us that smaller plans will often end up with a prototype plan offered by a third-party administrator or a bundled-service provider; while larger plans may have a custom plan document but still use a third-party administrator, bundled-service provider, or independent recordkeeper. These administration providers will oftentimes manage the administration of the plan, handle all the day-to-day responsibilities, and make nondiscretionary recordkeeping decisions. Whether these providers are fiduciaries will depend on the exact circumstances of each situation, but “An advisor or consultant can play a key role in helping you figure out exactly what fees are being charged and what services are being provided by the recordkeepers and other providers.” Levine adds, “They can help you confirm and document that the fees your plan is paying are reasonable.”

      The most common and typically the biggest role played by most advisors is in relation to the plan investments. In this case, the advisor can act as the fiduciary in the selection, monitoring, and retention of investment offerings for the plan. This includes vetting the managers, evaluating risk and return, and determining how the investments have done relative to peers and benchmarks. The advisor can either lead or help go through this process if the default plan fiduciary doesn’t have the time, resources, or skills to do this work internally. A plan might even hire the advisor to assume full control or discretionary oversight of the investments for the plan. In all cases, the plan fiduciary needs to define the breadth of responsibility as well as agree to the advisor’s fees. Says Levine, “Fiduciaries have a duty to properly appoint an investment manager. But once the decision is made, the risk is mostly shifted to the investment manager at that point (subject to a duty to monitor the investment manager).”

      When we asked Levine what final words he had with respect to the changing role of plan sponsors and external advisors, he commented that “Too often, plan sponsors are bombarded from so many sides with information about these issues. Good advice and good support from outside parties doesn’t have to be overwhelming to plan sponsors and plan fiduciaries. In fact, it appears to be moving us in a good direction where, hopefully, it will advance the entire system’s objective as we move forward.”

      HIRING AN INVESTMENT CONSULTANT

      DC investment consulting is a growing profession. In PIMCO’s 2016 Defined Contribution Consulting Support and Trends Survey, the 66 participating DC consultant and advisory firms reported serving over 11,000 plan sponsor clients who together represent combined plan assets of over $4.2 trillion. These firms say they provide a broad range of services, including investment policy development and documentation, investment design, recordkeeping searches, and total plan cost or fee studies. Nearly all said they are willing to serve as a 3(21) nondiscretionary advisor – that is, they will make recommendations with respect to which investments a plan sponsor may want to select. The majority of consultants also are willing to serve in a 3(38) discretionary fiduciary capacity over such functions as manager selection, glide path oversight, and investment management. This allows the consultant to make decisions for the plan sponsor, such as which investment managers to hire. Consultants expect continued growth in discretionary services for clients, as clients may initially hire the consultant as a nondiscretionary advisor and then migrate the consultant to a discretionary role.

      While hiring a consultant can help fulfill a plan’s fiduciary duty, it is important to note that plan sponsors are not necessarily protected by going with the consultant’s recommendation (no matter how well-documented that decision may be). In commenting on a recent lawsuit that followed a line of decisions that held that “independent expert advice is not a ‘whitewash,’” Fleckner said: “The court explained that a fiduciary who relies on an expert, like a consultant, should make certain that reliance on the expert’s advice is reasonably justified under the circumstances. The court cautioned that the sponsor cannot reflexively and uncritically adopt investment recommendations.”

      Ultimately, plan sponsors may take a different direction than recommended by their consultant and still meet their fiduciary duty. In fact, “if the sponsor believes that the consultant’s recommendation is contrary to the interests of the plan and participants,” comments Fleckner, “or it believes that the consultant did not engage in a rigorous enough process, then the fiduciary may be obligated to reject the recommendation. As discussed with any fiduciary decision, the plan sponsor should document its rationale for taking action that differs from the consultant’s recommendation.”

      GETTING STARTED: SETTING AN INVESTMENT PHILOSOPHY AND GOVERNANCE STRUCTURE

      In 2015, in collaboration with our UK-based colleague at the time, Will Allport, and a host of multinational plan sponsors, we created a guide to achieving a consistent philosophy and governance structure for global DC plans, Global DC Plans: Achieving Consistent Philosophy and Governance (DC Designs, November 2014). Whether you are a plan sponsor offering a plan only in the United States or via multiple plans around the world, it may be helpful to consider the following five-step process for DC retirement plan design.

      1. Establish a plan philosophy and guiding principles

      2. Set retirement plan objectives and design

      3. Create a governance oversight structure

      4. Formulate objective measures of success

      5. Outline implementation considerations

      We’ll look at each of these steps in turn.

Establish Global Philosophy and Guiding Principles

      It is sometimes a great challenge for organizations that already have a complex employee benefits and pensions landscape to step back and consider the basic question: “Why do we offer a DC plan?”

      Although it seems simplistic, we believe asking this question is a critical first step in establishing a philosophy for DC design. Does an organization want to be paternalistic to its employees, to educate, guide, and empower them toward successful retirement outcomes, to be an attractive employer, and to retain and nurture talent? Or alternatively, does an organization offer pensions simply to satisfy legal or fiduciary requirements, or perhaps simply to meet the market norm? The reality is often a combination of all of the above, but establishing which motivations are most important will aid organizations in creating the guiding principles for all of their pension plans.

      While an overarching philosophy to apply to pension benefits is somewhat intangible, the principles through which an organization ensures this philosophy is delivered should be anything but! The