What Fiduciaries Should Know

Perspective on the regulatory aspects of adding ESG funds to retirement plans.


DOL fiduciary rule: The rule is dead, long live the rule?

In June 2018 the Fifth Circuit Court struck down the Department of Labor’s fiduciary rule that would have required financial advisors to act in their clients’ best interests. Shortly thereafter, the DOL put the issue right back on its regulatory agenda for 2019. Now it appears the DOL will be coordinating with the SEC, which many feel is the rightful regulator to lead this second chance. Even so, the vast majority of the issues addressed in the rule apply to the retail marketplace rather than institutional ERISA plans.

For 401(k) plan sponsors, the fiduciary rule would have had the most impact on participants making decisions about rollovers when leaving employment. In these cases, plan participants often rely on education and advice from the plan recordkeeper. But recordkeepers that also have retail IRA services may steer participants to roll their accounts over into the recordkeeper’s IRA – a source of possible conflict. In our experience, these service providers typically succeed in rolling 15% to 50% of eligible accounts into their retail IRA products.

In this case, recordkeepers had already modified their communications to comply with the prior fiduciary rule, primarily through added disclosure. Whatever shape any new regulations may take, recordkeepers will certainly comply, so plan fiduciaries should review this revised language if and when new rules are published.

Best practices for plan committees
While the DOL fiduciary rule would have had limited impact on most 401(k) plan sponsors, more relevant insight came from the courts in 2018. In one of the very few ERISA cases to go to trial, the judge dismissed all counts against NYU’s retirement plan committee.1 The judge’s opinion provides some very clear language on how this court evaluated the work of NYU’s fiduciaries. Important lessons included:

  • Process matters – A primary pillar of NYU’s defense was the committee’s prudent process, which the judge highlighted in her decision. It was also helpful that the committee kept detailed minutes of its meetings, especially those surrounding key decisions.
  • Committee member engagement isn’t optional – Some of NYU’s committee members were chastised by the judge for lack of engagement and a casual attitude toward their fiduciary role. While committee members are not expected to be experts in all areas of 401(k) plan management, all members must engage in the work of the committee and are expected to ask questions if they don’t understand an issue.
  • Over-reliance on advisors – NYU engaged outside advisors to help with investment and vendor management issues. This use of experts provided the committee with valuable insight and advice, but the court cautioned that fiduciaries should not blindly rely on advisors. Again, it is important to document discussions, especially those where the committee does not follow the advisor’s recommendation.
  • RFPs are critical to due diligence – NYU used requests for proposal (RFPs) as part of the process to prudently manage their vendors. The court recognized this as an important component of NYU’s fiduciary oversight. In a marketplace that changes as rapidly as the 401(k) world, RFPs should be part of normal operating procedure for all plan fiduciaries. Committees that haven’t looked at their vendors in three to five years should plan to invest the time, energy and money to take this critical diligence step.
Overall, the NYU court ruling confirmed what most advisors have been telling plan fiduciaries for years. Given this clear guidance from the court, it may be worthwhile for committees to take a step back and review their fiduciary compliance procedures. These should include planning education for new members, discussing roles and responsibilities, and developing a multi-year RFP schedule for outside vendors.

Student loans and 401(k) plans
The IRS issued a private letter ruling in August 2018 focused on a 401(k) plan sponsor that wanted to help employees with student loans. According to Forbes, the average student debt for the class of 2016 is over $37,000. These debt levels are affecting the ability of new graduates to judge their financial commitments, including saving for retirement.

To address this challenge, the employer wanted permission to recognize employees’ student loan repayments and provide an employer match as if the payment had gone into the company’s 401(k). The IRS approved the arrangement and also provided guidance on additional administrative steps. A key technical issue was the IRS ruling that these programs do not violate the tax code’s “contingent benefit” provisions. With this roadblock removed, we can expect other companies to consider adding this type of benefit for their employees.

Retirement plan trends

Callan’s 2018 Defined Contribution Trends Survey1 reflects the opinions of more than 150 plan sponsors. It’s a valuable resource for both advisors and plan sponsors. A few highlights:
  • Asset retention – Over 50% of sponsors are working to retain assets in their plans.
  • Continued focus on fees – Respondents’ number one response regarding the most important step to improving their fiduciary position.
  • Distribution options – Over half of plan sponsors are looking to partial distributions and similar offer installments to retain assets in their plans.
Target date funds
Target date funds continue to dominate 401(k) plans – especially in the minds of fiduciaries. Whether a plan uses a proprietary mutual fund offering from their bundled provider or a custom-designed collective trust, these multifaceted investments present particular challenges to plan fiduciaries. Entering 2019 after a ten-year bull market, advisors would be wise to help fiduciaries give their plan a thorough review. Topics include:

  • Level of active management – Target date funds are no different from the rest of the investment universe, and active management may add value over and above management fees. Some providers offer three target date series – fully active, partially active / partially indexed, and fully indexed. In addition, there are now target date funds that factor environmental, social and governance (ESG) considerations into the investment process.
  • Risk management via glidepath – In addition to diversification, the primary risk management tool used by target date funds is asset allocation across the fund’s glidepath. There are broad differences between providers. Over the last decade, risky target date series have benefited from a long and often synchronized rise in markets globally. The future may not be so stable.
  • Distribution phase – Of particular concern is the risk embedded in target date funds for older participants and retirees (“income funds”) – especially when they begin taking distributions. Many providers still maintain a 40%+ allocation in risky assets for participants in the drawdown period. During the Great Financial Crisis in 2008, many of these income funds lost over 20% of their value. A loss of this magnitude can be particularly difficult to recover, especially for retirees.
Since the target date series is typically also the Qualified Default Investment Alternative (QDIA), this is one of the most important fiduciary decisions. Given the markets, constant developments in offerings, and the importance of this one decision, we would recommend review.


About the Author:

Dan Cassidy, FSA, CFA®
Dan Cassidy is a senior advisor at the River and Mercantile Group. In over 25 years working with plan sponsors, Dan has specialized in cutting-edge approaches to risk management. Integrating investment, actuarial and fiduciary advice, Dan works with plan sponsors to maximize the effectiveness of their retirement programs.
Dan Cassidy is not an employee or associated person of Natixis Investment Managers and is independently responsible for the information provided and for his expressed views and opinions on all topics. Mr. Cassidy’s views and opinions are not those of Natixis Investment Managers. Views and opinions expressed by him should not be relied upon as advice, as the content of material provided by Mr. Cassidy (such as text, graphics, images, and other material) is solely informational.

This material is intended for informational purposes only, does not constitute investment advice and should not be construed as a recommendation for investment action. The information provided does not take into account the investment objectives, risk tolerance, restrictions, liquidity needs or other characteristics of any one particular investor.
All investing involves risk, including the risk of loss.

Investments in target date funds are subject to the risks of the underlying funds and separately managed segments. Principal invested is not guaranteed against losses. It is possible to lose money by investing in a target date fund, including at and after the Fund’s target date.

1 https://www.courtlistener.com/docket/4357572/348/sacerdote-v-new-york-university/

2457776.1.2