News & Information

 

FEATURED PRODUCT

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

Learn More »

CCH® PENSION — 04/18/11

Plan sponsors favor limited scope investment advisors over investment managers, survey finds

A recent survey has revealed that most plan sponsors engage limited scope investment advisors, rather than investment managers, for purposes of selecting and managing plan investments. Under such limited scope arrangements, the plan sponsors and investment advisors have co-fiduciary responsibilities with respect to plan investments and share in the attendant liability.

CCH Note: The survey was conducted online from November 2010 to January 2011 by Grant Thornton LLP, Drinker Biddle and Reath, and Plan Sponsor Advisors. Over 400 independent plan sponsors participated, representing manufacturing, wholesale and distribution (29%) and not-for-profit (29%) concerns, as well as retail (12%), financial institutions/services (10%), technology (9%), construction, real estate, and hospitality (5%), general services (4%), and other industries (3%).

Investment advisor relationships

Grant Thornton found that slightly over one-half of plan sponsors work with limited scope investment advisors (ERISA §3(21)(A) advisors), under arrangements in which the advisor and the plan sponsor have co-fiduciary responsibility with respect to plan investments and share attendant liability.

Alternatively, 14% of plan sponsors engage an outsourced investment advisor (ERISA §3(38) investment manager). Pursuant to this arrangement, the investment manager selects and adjusts investment options without explicit direction from the plan sponsor. The investment manager is empowered to manage, acquire and remove investment options.

The plan sponsor does not retain any veto power over the investment process. However, Grant Thornton cautions plan sponsors that engage an ERISA §3(38) investment manager that they have a continuing fiduciary responsibility to prudently select and monitor the investment manager. In addition, plan sponsors remain responsible for administration and compliance issues associated with the plan, unless the plan recordkeeper or third party administrator has assumed, in writing, fiduciary responsibility for plan administration.

Factors to consider in structuring fiduciary arrangement

In determining whether to adopt an ERISA §3(21)(A) limited scope investment advisor or an ERISA §3(38) investment manager relationship, Grant Thornton suggests that plan sponsors consider the following factors:

(1) the investment committee's expertise and capacity to interpret, and monitor investment metrics, as well as its understanding of the risks and fiduciary responsibilities of the plan sponsor;
(2) the interest of the plan sponsor in selecting and monitoring plan investment options; and
(3) the higher cost of outsourcing fiduciary responsibility to investment managers.

CCH Note: Related to the issue of the expertise of plan fiduciaries, 77% of the plan sponsors reported providing fiduciary training to their plan's administrative/investment committee. However, 41% of respondents indicated that they furnish such training "only infrequently and with no set pattern." In light of the many new developments annually impacting plan fiduciaries, Grant Thornton recommends, as a best practice, providing fiduciaries training every year, supplemented by legal updates of new developments as they arise.

In addition, Grant Thornton notes that some investment advisors may elect not to provide advice with respect to company stock. Therefore, plans with company stock must clearly establish responsibility for the monitoring of company stock.

CCH Note: In large measure because of liability concerns, the agreement with the investment advisor should clearly state whether the fiduciary advisor will be a limited scope investment advisor or an investment manager.

Operational compliance review

Grant Thornton acknowledges that compliance with tax and legal requirements has become increasingly difficult for plan sponsors. As a means of assessing the audit and litigation risks faced by a plan, Grant Thornton suggests that plan sponsors conduct periodic operational compliance reviews. Well over half (59%) of respondents indicate that they have conducted one or more tax/ legal compliance reviews of the plan in the last year. In addition, 37% of plan sponsors perform general reviews of the entire plan, while 22% limited reviews to select issues.

Common compliance issues

The most common compliance issues requiring correction reported by survey respondents involved: eligible compensation (16% of respondents), participant loans (15% of respondents), service-crediting (15% of respondents), improper inclusion and exclusion of participants (14% of respondents), and improper plan distributions (9% of respondents). Grant Thornton cautioned that all plans have compliance problems at some level. The 47 percent of respondents that indicated that they have not corrected any compliance issues, Grant Thornton charged, "are just not looking for them, or even worse, failing to correct problems once identified."

CCH Note: Grant Thornton recommended the use of the IRS 401(k) Plan Compliance Questionnaire (see CCH Pension Plan Guide Newsletter, Report No. 1838, May 24, 2010) as a tool for self-audit. Using the Compliance Questionnaire to conduct a self review can help a plan sponsor provide answers during an audit, confirm efficient access to data, design answers about plan specifics, and uncover mistakes that could be costly if not corrected early.

Source: Grant Thornton 2011 Retirement Plan Survey, "Trends and Insights: Focusing on the Fiduciary Agenda."

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.