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Back to the Basics – Pay Special Attention to the Fund Menu.

Back to the Basics – Pay Special Attention to the Fund Menu.

At some point, a certain amount of apathy and blasé comes to those who watch legal proceedings relevant to retirement plans. Another excessive fee lawsuit involving overpriced funds. More performance lagging investments. Failure to negotiate rising recordkeeping costs.

However, a unanimous, swift, and pointed proclamation from the Supreme Court merits attention. And the most recent treatise demands that plan sponsors and their advisors go back to the basics with respect to retirement plan fund menus.

In the matter of Hughes v. Northwestern University, SCOTUS rejected the idea that a fiduciary can escape the legal challenge of having imprudent investment options in the plan, as long as there are other, prudent options. Rather, the Court reinforced the notion that plan fiduciaries must monitor “all” plan investments and remove “any” imprudent ones. Furthermore, fiduciaries must consider all the investments “at regular intervals” to ensure that they are prudent.

Is this being done? As a plan sponsor or a retirement plan advisor, are you regularly reviewing your plan’s fund menu? With all the focus on “financial wellness” and “fiduciary training,” let’s not forget the basics: Fiduciaries must actively review plan investment options, ideally against stated criteria, at regular intervals. Equally important is documentation of this review.

And believe us when we say, we see a lot of imprudent fund menus. These often take the form of (1) revenue sharing paying funds stacked alongside funds paying no revenue sharing, (2) the use of retail share classes when a lower cost share class is available and (3) much to the frustration and confusion to participants, an excessive number of redundant funds, especially prevalent with insurance company products. With all due respect to all parties involved, these issues arise because of simple neglect.

Hughes was but one case in a long line of suits claiming fiduciaries imprudently selected or failed to monitor plan investments with excessive fees and underperformance relative to peer groups or lower cost share classes of identical investments. When it comes to fund menus, there is no place for apathy.