Plan sponsors have a responsibility to protect the interests of employee and retiree participants in their benefit plans. Government plan sponsors for 457 and 401(a) defined contribution (DC) retirement plans should be aware of fiduciary basics and the latest trends to protect the interests of their participants.

In the International Foundation webcast, “Fiduciary Basics for 457 Government Plan Sponsors,” Robert Whited, managing director at Creative Planning Retirement Services, and Jeffrey Chang, partner at Best Best & Krieger LLP, discuss the increased role of public sector DC plans, fiduciary best practices for plans and industry trends to be aware of.

Increased Role of Governmental Plans

In the webcast, Whited and Chang discuss why there is an increased role for governmental DC plans, making these plan types more popular as the role of defined benefit plans has declined. DC plans offer several initiatives to help combat the retirement crisis, including:

• Catch-ups. With new retirement readiness rules, new opportunities for catch-ups are available to 457 plans.
• Negotiated labor contracts for 401(a) plans. As more weight is placed on DC plans, labor contracts have become more visible and instrumental for retirement plan success.
• State pension adjustments for new hires. New hires may have different calculations according to new state laws.
• Demographics of the state and local worker group. With fewer older employees in the workforce, the culture of staying with one employer long-term is disappearing. Because formulas are often based on years of service, employees may not value traditional pension plans as much because they do not remain with a single employer long enough to benefit from it.
• Market activity. There is an increased exposure of market and federal government activity in social and news media, raising awareness for younger generations who view investing as creating more opportunities to reap the benefits of a DC plan.

Fiduciary Basics

Chang explains two ways to become a fiduciary:

• Exercising fiduciary authority/control over management of a plan
• Appointment as a fiduciary of the plan.

He discusses a recent study by Simon, which revealed that despite different state laws establishing different fiduciary standards:

• All 50 states and the District of Columbia have adopted some form of fiduciary standard of care for their public retirement plans and systems
• Thirty-six states have adopted ERISA’s standard of care in whole or nearly identically.

The ERISA standard of care states that a fiduciary shall discharge his duties with respect to a plan with the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a character with like aims.”

Chang says the standard requires one to act as a prudent expert while being compared to existing fiduciaries of other retirement plans.

A plan’s standard of care applies to the following activities:

• Duty to follow the terms of the plan
• Duty to diversify plan investments
• Duty of administering the plan in the best interests of participants (duty of loyalty) and defraying reasonable expenses of administering the plan
• Duty to act impartially and to delegate responsibilities, if necessary
• Duty, in a participant-directed plan, to prudently select and monitor investment options.

Whited discusses proper plan administration given these standards of care. Proper administration requires:

• Constant and regular attention. Administration should not be left to policymakers who meet infrequently.
• Familiarity with the terms of the plan. Fiduciaries must have read through the plan and understand how it works.
• The use of appropriate third parties. Because most plans use outside recordkeepers, TPAs, advisors, actuaries, attorneys, consultants, etc., the “point of contact” must be specific and acknowledged.

Remember: Follow the written terms of the plan so the plan doesn’t risk disqualification for tax purposes and become part of a lawsuit it is likely to lose in court.

Industry Trends to Know

Whited and Chang discuss industry trends plan sponsors should know to keep up with their fiduciary duties:

• Recordkeeping and investment fees have dropped recently. Fees should be independently benchmarked every three to five years. Fund fees should be lower since 2020.
• Guaranteed/fixed options, insurance separate accounts and collective investment trusts (CITs) must be scrutinized carefully. They are not subject to the same regulatory/disclosure materials as mutual funds and have less transparency.
• Managed account fees are a new revenue source. Look carefully and make sure the fee is reasonable. In some plans, the fee can be half of the entire revenue that the service provider is getting.
• Five-year contracts are now heavily marketed by service providers. Make sure the plan sponsor or outside counsel reads the termination clause very carefully.
• Plan sponsors have a responsibility to pare down and review the fund menu. In Hughes v. Northwestern, the court said a plan cannot just make a lot of options available and let participants figure it out.
• Complaints by employee groups surrounding Ukraine, Gaza, ESG. Employee groups may request to change investments within their retirement plans to screen for and eliminate adverse impacts. This is not within a plan sponsor’s control as they are not choosing what a mutual fund invests in. The plan can offer certain mutual funds that are considered ESG-tilted, for example, to make a participants’ investment more politically acceptable.

To learn more about the role of a fiduciary in a government DC plan, view the entire webcast recording, “Fiduciary Basics for 457 Government Plan Sponsors.”

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.