Fiduciaries in a Volatile Stock Market

Seeking a Safe Course

A complex financial environment such as the one facing investment fiduciaries who oversee retirement and pension plans comes with a barrage of investment opinions from external advisors and an influx of inquiries from employees and even their beneficiaries.?This constant theorizing on potential investment strategies, adjustments, and outcomes can make the idea of adhering to simple principles a challenge.?Fortunately, there are tangible steps investment committees can take to help keep them on a safe and steady course, regardless of turbulent external factors.

Investment risk management is persistent, ongoing, and intricately linked to every aspect of governance, risk management, and compliance ("GRC") in a fiduciary setting. ?It's not a one-time-only undertaking.?The continuous nature of changes in pricing, investment structures, and the needs of a retirement plan's participants require unremitting learning about threats and opportunities.

For example, decisions to realign asset class choices, fund managers, and managed account programs hinge on the prudence of committee members.?A GRC management system offers a disciplined way to ensure understanding of the principles by which regulatory watchdogs and plan participants judge those decisions.

To be clear, GRC is not a technology. ?GRC is not a department.?It refers to the people, processes, technology, and information that help enterprises take complete control of the retirement plans they sponsor.?In all too many cases, power was allowed to gradually leak to vendors who are not legally accountable by federal pension and state trust laws for their actions.?GRC helps investment committees maintain control and fulfill their moral and legal obligations reliably and confidently.

The Tyranny of Hind Sight?

Investment committees must rectify any shortcomings in their investment decision-making methods to adjust their practices to the turbulent investment securities atmosphere.?Fiduciary laws emphasize the burden of taking into account current facts and circumstances.?A radical change in investment market conditions, like the current one, intensifies the weight of that burden.?It sets the stage for investment strategies and fiduciary conduct to be called into question after the fact by activist plan participants and relevant regulatory agencies.

Hindsight has no value when executives find their activities challenged without adequate procedures and records to back up their decisions.?The potential for investment decisions to be disputed long after deliberation is a severe challenge.?A defined and consistently executed governance, risk management, and compliance system can prepare committees to meet it confidently head-on.

An Action Plan for Volatile Market Conditions

?Adopting a GRC management system for your retirement plan promises to organize and simplify investment management duties.?For employers who have yet to install a GRC workflow and controls system, current conditions may dictate the need for more immediate action.?In response to the pressing need to manage investment risk factors related to market volatility, finance, and human resources leaders may want to consider the following four steps.

1. Identify the key players and ensure that all parties know their responsibilities. ?Most Investment committees rely on at least one, if not several, outside experts for guidance, given the esoteric nature of the investment industry and the various demands on their time.?Indeed, this strategic outsourcing is a recommended practice under fiduciary laws.?It may be true that each of these retirement plan service providers is suitable for guidance regarding the selection of plan investments.?However, it is essential to know which of these advisors (if any) is legally accountable for providing that type of advice.?For example, recordkeeping firms can be considered a resource for investment counsel.?By their choosing, though, few accept a legal investment fiduciary obligation.?While nothing about this arrangement is inherently wrong, an investment committee must be clear about the delineations in this type of relationship.?Only then will all parties understand where the ultimate discretion and decision-making power reside (both for practical and legal purposes).
2. Maintain regular communication with the plan's participants.?Employee communication is perhaps the most challenging aspect of an investment committee effectively carrying out their fiduciary duty.?The creation and execution of a program to distribute consistent, relevant information for plan participants about investment options and performance are essential.?An employer can team with an investment provider to create and disseminate this type of information.?Still, the investment committees must play an instrumental role in designing this type of campaign strategy.?After all, the investment committees have the advantage of knowing the participant audience, demographics, and needs intimately.?A study of these factors is essential when determining the medium (print or electronic, or both), frequency, and information scope that participants receive on an ongoing basis.?A well-executed communication plan can be the difference between having a group of agitated employees and a team that believes their leadership is doing everything it can to protect their interests.
3. Document the decision-making process. ?When talking with Investment committees, most believe they spend an adequate amount of time managing their retirement plans.?Over the last few years, the U.S. Department of Labor's ("DOL") enforcement activity reveals that many investment committees who spend significant time monitoring their retirement plans lack evidence of their efforts.?Specifically, the DOL seeks documentation proving a careful decision-making process.?One of the DOL's strong recommendations includes recording minutes of any formal meetings involving the retirement plan, including sessions for the investment committee, advisor reports or updates, management discussions, and vendor evaluations.
4. Make sure the investment policy is relevant to the current market setting. ?Even if the investment committees have not prioritized a regular review of the plan's investment policy in the past, current volatility prompts the need for an up-to-date analysis.?That is especially vital to ensure fidelity by all parties involved in the retirement plan's decisions.?The investment policy details how an organization will enable its participants to be "retirement ready" and specifies the plan's risk tolerance and diversification metrics.?In a shifting financial market landscape, Investment committees and their advisors must be confident that; 1) the parameters of the investment policy serve participants' best interests, and 2) all investment activities align with that strategy.?A review of the investment policy with an independent risk management specialist can ensure that all four fiduciary disciplines are in harmony (i.e., governance, administration, investments, and controls).?Such a specialist can also confirm that all parties, including vendors, who take care of the plan fulfill their role under fiduciary rules.

Conclusion

In the stock and bond markets, turmoil does not have to be a source of fear for well-meaning investment committees.?By contrast, well-prepared fiduciaries can feel confident that they adhere to best practices while helping their constituents weather economic uncertainty.?Fiduciary laws do not require that investment committees control the markets, and instead, their responsibility centers on the management of a process.?It will ensure that a retirement plan's investment structure is best for the plan's participants.?An appropriate process framework will also show a track record of prudent decision-making that is defensible in any third-party challenge.

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