Recent shakeups in financial markets and institutions have led to inquiries from plan sponsors about what to do regarding retirement plan investments. So far, retirement plans losses appear to be modest. However, plan fiduciaries may wish to consider taking steps to ensure that they are meeting their fiduciary obligations. Such steps will generally depend on the type of retirement plan and how assets are invested.
Most defined contribution plans, such as 401(k) plans, provide participants with the ability to direct their plan account investments among numerous investment choices, typically mutual funds. While fiduciaries of such plans generally follow provisions of ERISA that provide protection against liability for losses in such accounts, the fiduciaries are still responsible for ensuring that funds made available to participants are prudently selected and monitored. Thus, it may be prudent for fiduciaries to immediately request the plan’s investment advisor to provide a review of the funds available under the plan, including evaluations and documentation of such factors as the diversity of the available funds across the investment spectrum and the performance of each fund against its benchmark. While such a review may result in no change to available investment funds, the key protection for fiduciaries is considering the current market developments and documenting their review.
Because sponsors bear the ultimate responsibility for funding defined benefit plan benefits, the market turmoil will most directly impact funding requirements. In light of recent negative returns for most investments, fiduciaries may wish to review asset valuations and liabilities to anticipate potential increased contributions as well as to determine whether any participant notices of underfunding may be required in the near future unless additional contributions are made.
As for bank closings, the assets of many retirement plans are held by financial institutions such as banks or trust companies. A fundamental principal regarding potential risk is whether plan assets become assets (or liabilities) of that financial institution. In most cases, plan assets are held in either a custodial or trustee relationship. If so, the plan assets generally do not become assets or liabilities of the financial institution and are not subject to claims of its creditors. Examinations by regulators generally are designed to confirm compliance with these rules. Nonetheless, plan fiduciaries may want to determine whether any assets are held as FDIC-insured bank deposits and if so, whether the assets held in this manner exceed available insurance coverage.