One of my favorite stories concerns a horse that was found wandering in the countryside. No one knew where it had come from, since the animal had no distinguishing markings or tattoos. But those who found the wanderer couldn't imagine keeping the horse for themselves–it needed to be returned to its rightful owner.
A farmer decided to bring the horse home, mounting it, leading it to the road, and then allowing the horse to pick its own direction. Only when the animal left the road to eat grass or to walk into a field would the farmer firmly guide it back to the road.
After some time the horse returned to its home, surprising its owner, who asked the farmer how he had known where to bring the horse. "I didn't know, the horse knew!" said the farmer. "All I did was to keep him on the road."
Here is a method designed to help your clients who themselves serve in fiduciary roles to stay on the right road, while at the same time adding value to your relationship with the client.
Let's say you have a number of clients that sit on their companies' 401(k) investment committees. Here is a common problem facing such a fiduciary client: Many committee members, while they realize they have a fiduciary obligation, are under the impression that their bundled service provider or third party administrator will protect them. Unfortunately, all too often, this is not the case.
As a fiduciary, their obligations are defined under Title I of ERISA, and as investment committee members they have responsibilities to oversee tasks often done by several individuals from more than one organization. In addition, they also have overall review responsibility for plan documents, selection of investment options, remittance of plan contributions, quarterly benefit statements, employee communications, and government and regulatory filings, to name just a few of their responsibilities. Keeping track of this paperwork is often the last thing committee members want to do. But this continues to be an important area where you can help the "horses" find their way home, and where you can distinguish yourself by adding value to your relationship with those clients.
First and Last: Document, Document, Document
A retirement plan fiduciary's primary efforts should be focused on establishing a procedurally prudent investment process including the setting of investment policy, selecting the professionals to implement the process, and monitoring the results of the process. Given this mandate, it is critical that plan fiduciaries maintain ready access to documents that demonstrate they are following a "prudent" process that has been properly established and adhered to, and that significant decisions affecting the plan have been adequately documented.
Documentation is critical in fulfilling the role of a retirement plan fiduciary and may span a wide array of both internal and external reporting requirements. Internal records should be maintained to build an audit file that is readily available and can be quickly produced for review or audit purposes, and to verify compliance with applicable rules and regulations. External reports are required to satisfy plan participants, their beneficiaries, and regulatory authorities that assets are being properly administered and prudently invested. All these can be kept in an easy to access notebook or other simple filing system.
Building a Comprehensive Audit File
The Nobel Prize winning physicist Murray Gell-Mann said that he thought the most valued personal trait in the 21st century will be the facility for synthesizing information–to decide what information to heed and what information to ignore, and the information that can reveal non-obvious relationships within big-picture complexity. All the needed pieces of information may be at hand, but they may be hidden from plain view.
To gain that synthesis, collect and keep the following documents, at a minimum, in a fiduciary notebook for your client. Imagine how your client is going to feel when you show up with a simple system such as a binder with several folders that can hold a series of tabs for each required document. This notebook can be labeled "Fiduciary Audit File" with the name of your client on the cover. Inside the notebook can be tabs labeled Summary Plan Description, Investment Policy Statement, Trust Documents, Service Agreements, Money Managers Information, and other topics specific to the plan or sponsor. This one notebook will be the system that locates all documentation in one place in an organized fashion and in a form that is easy to maintain.
It is important to note that this checklist was developed as a general guide and that each plan may have unique internal and external reports that must be retained. My caveat: You should consult your compliance department or have this list reviewed by your retained retirement plan counsel and get their blessing before you show it to your clients.
The remainder of this article is divided into nine sections as listed below, which represent the major tabs in the Fiduciary Audit File. Here's what should be included in each of those tabs:
Tab 1: The Plan Documents
All plan trust documents–plus a summary of any material modifications–along with all amendments, addenda, and attachments go behind this tab along with your adoption agreement if you have a prototype plan. Include a copy of summary annual reports and trustee reports for the past seven plan years and your "Plan Summary Description," including all amendments and attachments that summarize the specific features of your plan; eligibility, benefits, contribution limits, vesting schedules, and distribution rules. In essence, this tab contains the "formalities" of the plan, with the required signatures evidencing the actions taken to establish and administer the plan.
Tab 2: Government/Regulatory Requirements and Communications
Keep a copy of Internal Revenue Service Form 5500 and your audited financial statements that accompany the 5500s and any applicable notes. Include here as well any letters or other communications from the Dept. of Labor, attorneys, new rules, or regulatory releases from the appropriate regulatory/legislative bodies.
Tab 3: Journals and Ledgers
