Establishing a Fiduciary Due Diligence Process

“The word fiduciary, I think, is frightening to a lot of people,” Paula Boyer Kennedy, Vice President, Investment Services, Cammack LaRhette Consulting, told attendees of the 403(b) Symposium in Boston, sponsored by Cammack LaRhette and PLANSPONSOR .

According to Boyer Kennedy, the reasons for establishing a fiduciary due diligence process include:

• To establish a process to help protect plan participants and the organization by minimizing liability,
• To know the laws pertaining to the plan,
• To diversify assets to maximize the ratio of return to risk,
• Have an investment policy,
• Use and monitor prudent experts,
• Document due diligence,
• Control and account for fees,
• Avoid conflicts of interest, and
• Help ensure the plan maintains compliance and competitiveness in the industry.

A fiduciary due diligence process will help sponsors monitor investment performance and criteria and monitor plan participation and utilization, Boyer Kennedy says.

The five steps to establishing a fiduciary due diligence process include:

• Analyze documents and present environment – Are investment policy statements, trust, custodial and service agreements up to date? Is the plan in compliance with regulations? Do fiduciaries know they are fiduciaries?
• Investment diversification assessment – Are there duplicates in investment offerings? What is missing from investment offerings? Do too many options affect diversification? Are investments by participants appropriate?
• Review the process – Are fiduciaries doing what they should in monitoring an selecting funds, accounting for and controlling investment expenses, and plan administration.
• IPS evaluation – Are the investment options aligned with the Investment Policy Statement? Are the investments appropriate for the plan size? Are participants receiving the education they need?
• Ongoing due diligence – Are steps in place to replace or monitor funds? Are steps in place to renegotiate provider contracts? What is the impact of current economic conditions on plan funds?

Finally, Boyer Kennedy advises that reports generated for plan investments should be coordinated with the IPS, employee demographics, and company culture. Sponsors should educate vendors and consultants on this.