• Practical Pointers for Plan Fiduciaries in Uncertain Economic Times
  • September 27, 2008 | Authors: Randy L. Gegelman; Margaret (Peggy) D. Lin
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • The plan sponsor or other named fiduciary of a defined contribution plan generally is responsible for selecting and monitoring the investment options available under the plan. What should a plan fiduciary do in response to significant market turbulence?

    Under the Employee Retirement Income Security Act (ERISA), a plan fiduciary is not a guarantor of positive investment performance. However, ERISA does require a plan fiduciary to follow a prudent process in selecting and monitoring investment options.

    In light of recent market developments, plan fiduciaries should keep in mind that, while the recent market conditions may be rocky, plan investments generally are designed to be held over the long term. In the meantime, consider the following steps:

    Increase Monitoring on a Temporary Basis

    Stepping up normal monitoring procedures on a temporary basis can help plan fiduciaries assess and mitigate risk. Such measures might include:

    • Reach out to the plan's financial advisors. It may be wise to ask for a current update as to the status of existing investment options, rather than waiting for the next quarterly or other periodic report. Ask the advisor to comment specifically on whether the plan's investments pose any unique concern in the current financial environment.
    • Review and assess the report and any recommendations received. Evaluate what your financial advisor says. If unique risk factors are identified for your investments, take appropriate action which, depending on the circumstances, may range from putting the investment on a watch list for close and timely monitoring, to freezing the investment to new money or to eliminating the investment.
    • Establish an interim accelerated ongoing review process. While many plans currently provide for a quarterly or semiannual review process where plan fiduciaries review performance and other metrics regarding the plan's investments, it may be appropriate to establish a more frequent schedule on a temporary basis.
    • Document, document, document. ERISA is concerned with a prudent process, and the best way to demonstrate this is to carefully document your actions and decisions.

    Keep Plan Participants Informed

    Given uncertainties in the market, participants may appreciate an update about their investments and actions being taken by the plan fiduciary. In developing communications, consider the following:

    • Provide assurance that events are being monitored. Plan fiduciaries cannot promise that plan investments will not lose value, but they can reassure participants that a monitoring process is in place and being followed, and that experts who are experienced in investment matters are involved.
    • Reinforce basic investment principles. Remind participants of the value of diversification and the time horizon for retirement investing. If the plan offers company stock as an investment option, this may be an appropriate time to reinforce previous communications regarding diversification.
    • Remind participants of available resources. If the plan offers investment advice, remind participants of this valuable benefit. Participants may also want to seek their own financial advice.
    • Notice of unique risk factors. If unique risk factors with respect to any investment option are identified, that may require tailored communications regarding such factors.

    A prudent process is essential to risk management—and now is the time to make sure that such process is working appropriately.