Why Establish a Process for Evaluating Implemented Strategies?

Created by Kelly Knudsen, Modified on Thu, 5 Sep at 11:04 AM by Kelly Knudsen

A retirement plan is more than just a benefit for employees; it’s a fiduciary responsibility that requires constant attention and evaluation. Under the Employee Retirement Income Security Act (ERISA), plan fiduciaries must ensure that the retirement plan operates in the best interests of participants. Establishing a formal process to evaluate the impact of implemented strategies is crucial for maintaining compliance, optimizing plan performance, and protecting the financial well-being of employees.

1. Ensures Fiduciary Compliance
ERISA sets high standards for fiduciaries, requiring them to act prudently and solely in the interest of plan participants. A key part of this responsibility is the ongoing monitoring and evaluation of plan strategies, including investment options, service providers, and fees. By establishing a structured review process, fiduciaries can ensure they are meeting their obligations, documenting their actions, and maintaining compliance with ERISA. Regular reviews help demonstrate that plan sponsors are actively managing the plan in accordance with ERISA’s fiduciary duties [1] [7].

2. Optimizes Investment Performance
Investment performance is central to a retirement plan’s success. Without a structured evaluation process, underperforming funds or investment options may go unnoticed, reducing the growth potential of participants’ savings. Regular evaluation allows plan sponsors to analyze investment performance, assess whether strategies are meeting their objectives, and make necessary adjustments. A consistent review ensures the plan offers a diversified and competitive range of investment options that align with participants' retirement goals [3] [6].

3. Monitors and Controls Plan Fees
Excessive fees can erode retirement savings over time, so it’s critical for plan sponsors to regularly review the fees associated with investment options and plan administration. A formal process for evaluating these fees helps sponsors ensure that they are reasonable and competitive. Failure to monitor fees effectively can lead to fiduciary breaches under ERISA, as sponsors may inadvertently allow participants to bear unnecessary costs. Establishing an evaluation process helps control plan costs, maximizing the growth of participants’ accounts [4] [5].

4. Aligns with Participant Needs
Retirement plans should evolve alongside the needs of participants. A robust evaluation process enables plan sponsors to track how well the plan’s strategies are serving the employee population. For example, younger employees may benefit from more aggressive investment options, while older employees may prefer safer, lower-risk options as they approach retirement. Periodically reviewing the impact of the plan’s offerings ensures that participants' needs are met and helps to make adjustments based on demographic shifts or changing financial goals [2] [6].

5. Manages Risks and Improves Plan Stability
Retirement plans are exposed to various types of risk, such as market volatility, interest rate fluctuations, and inflation. A formal review process helps fiduciaries identify and mitigate these risks by assessing whether the plan’s current strategies remain appropriate given the economic environment. By continuously evaluating risk factors, plan sponsors can protect the stability of the plan and better safeguard participants' retirement savings from unnecessary risks [5].

Conclusion
Establishing a process for evaluating the impact of implemented strategies within a retirement plan is an essential practice for any fiduciary. This ongoing review ensures that the plan remains compliant with ERISA, improves participant outcomes, controls fees, adapts to changing employee needs, and manages risk. By prioritizing regular evaluation, plan sponsors can fulfill their fiduciary responsibilities and enhance the financial security of their employees.

References:
[1] Blank Rome LLP. (n.d.). ERISA Compliance and Litigation. Retrieved from https://www.bsllp.com/practiceareas/erisa.html
[2] Investopedia. (2023). Are You ERISA Compliant? Follow This Checklist. Retrieved from https://www.investopedia.com/articles/personal-finance/081616/are-you-erisa-compliant-follow-checklist.asp
[3] Verrill. (2023). Five Recommended Practices for ERISA Retirement Plan Administrative Fiduciaries. Retrieved from https://www.verrill-law.com/publications/five-recommended-practices-for-erisa-retirement-plan-administrative-fiduciaries/
[4] Wolters Kluwer. (2023). ERISA Requirements for Employee Benefit Plan Administration. Retrieved from https://www.wolterskluwer.com/en/expert-insights/erisa-requirements-for-employee-benefit-plan-administration
[5] Fidelity Investments. (2023). ERISA 404(c) Compliance for Plan Sponsors. Retrieved from https://sponsor.fidelity.com/pspublic/pca/psw/public/library/manageplans/compliance_erisa_404c.html
[6] John Hancock. (2023). Best Practices for ERISA Retirement Plan Fiduciaries. Retrieved from https://retirement.johnhancock.com/us/en/viewpoints/erisa--plan-design/what-are-some-best-practices-for-erisa-retirement-plan-fiduciari
[7] U.S. Department of Labor. (n.d.). ERISA. Retrieved from https://www.dol.gov/general/topic/retirement/erisa