The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

Fiduciary Discipline in Tumulultuous Times

October 2008

Without the ability to close the blinds, turn off the TV or the computer and avoid reading newspapers or magazines, everyone is acutely aware of the extreme volatility that continues to grip the markets. Suddenly, it seems, every investor is well versed on the dangers inherent in Collateralized Debt Obligations (CDO’s).

In such a time of turmoil, it is logical to wonder if prudent fiduciaries of 401(k) plans should do anything differently in response to the current environment. My advice is both “No” and “Yes”.

“No“: Continue to do the things that prudent fiduciaries should always do. Understand the investments that are offered within your plan. Monitor their on-going performance (to include adherence to their stated style, manager tenure and expense ratio), as well as how participants are managing their assets (Are participants well-diversified? Are they letting short-term market conditions influence their allocation?). Then communicate with participants about what is happening with the plan’s investments and in the broader market. And last but certainly not least, document your efforts.

“Yes”: In difficult markets, prudent fiduciaries need to be even more diligent in their efforts. Ask you investment advisor to provide detail about your funds’ holdings in certain troubled securities (AIG, Lehman Brothers, etc.) so that you better understand the current environment’s impact on your investment line-up. Shorten the frequency with which you receive performance and participant activity data so that you are able to more closely monitor the funds and your participants. Recognizing the anxiety felt by participants, communicate more often with participants and provide commentary and data to support the fact that while it may feel different this time, the markets have encountered crises before and things will improve in time. Document your efforts in greater detail, including minutes of committee meetings and conversations with investment advisors.

Certainly this is a difficult market environment for participants and plan sponsors alike. However, just like the markets, we may find that the discipline required by these turbulent times will make us all more effective when things inevitably return to some sense of normalcy.

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