Printer Friendly

A Krispy Kreme of a retirement plan: it's important to operate a plan according to Employee Retirement Income Security Act guidelines. Here's why.

LIFE IS FULL OF LITTLE TREASURES. My senses usually erupt near Krispy Kreme store. As I spot the green-and-white logo, I look expectantly for a lit red-neon "Hot Krispy Kreme Original Glazed Now" sign. It lets me know the doughnuts are being made fresh. I turn into the parking lot, where a deep sniff confirms what my eyes have already relayed to my brain: sugary hot deep-fried bread is only moments away.

I know I shouldn't eat tons of carbs past 6 p.m. and that there are more calories than I care to count in just one doughnut. But I love seeing the doughnuts come down the production line, culminating with a trip under a glazy waterfall, and emerging hot and ready to eat. An attendant chooses only the well-shaped ones, presenting them to me in a rigid box. It's hard to resist a doughnut that requires no chewing. It just melts in your mouth, thus ensuring my Krispy Kreme fix will stay intact even when I'm over 100 and have no teeth.

However, getting to 100 (or a reasonable retirement age) at an acceptable standard of living may prove to be more challenging than you might think.

Many college and university retirement plans are a hodgepodge of individual 403(b) contracts. The institution may even have an agreement with multiple companies, all offering their own menu of investments. It's simple to see how this phenomenon arose: Let's give the employee as much choice and variety as possible. For example, an employee may be able to choose from three providers, each of which offers 50 investments. Therefore, the employee must make a rational decision to diversify amongst 150 alternatives. Most of the investing public would probably have difficulty navigating through this labyrinth. It's no different for a college or university employee.

The Employee Retirement Income Security Act of 1974 outlines duties and responsibilities for those establishing retirement plans. It's a comprehensive guide on how to build a retirement plan. Your institution may or may not be exempt from following the ERISA guidelines. Either way, there are countless reasons why operating a plan according to ERISA can be helpful to both the employer and employee.

I bought a canopy for my backyard the other day. It came with about 300 different screws, multiple poles, and a myriad of different canvas types. After about two hours, it was up, a feat that would have taken days (possibly years) to accomplish had I not looked at the manual. The point? If we have a guide that cost the taxpayers of this country millions of dollars to write and further explain through interpretive bulletins, why not use it?

Following are some pointers for meeting the ERISA code guidelines. For simplicity's sake, let's assume employees can select their own investments from a larger list of available choices and that there are no employer securities to deal with.


The last thing we need is another committee, right? Wrong. Probably one of the most important parts of running a successful retirement plan is to have a group of individuals charting the course. The duties of these individuals (sometimes called fiduciaries) include:

* Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries and solely in the interest of those participants and beneficiaries.

* Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters.

* Following the plan documents.

* Diversifying plan investments.

* Defraying reasonable plan expenses.

If we decided to write a mission statement for the investment committee, it may look something like this:

We will endeavor to establish a retirement plan that allows our participants to choose from a diverse group of well-monitored investment choices, offered at a reasonable cost, with educational took provided, teaching how to construct a portfolio within differing risk tolerances.

Separately, the committee should establish standards for running the plan. This is typically set forth in an investment policy statement outlining how the committee will select, track, and unselect the managers, along with other operational procedures. Additionally, it should state emphatically whether or not the plan is going to act according to Section 404(c) of the ERISA code.

One regular task for the investment committee is to choose and monitor the investment choices given to the participants. It's like at Krispy Kreme, where the person who takes your order is probably also the one that selects the doughnuts coming off the line that meet a quality standard. Inevitably, a few don't make it into a box. Some may be discarded because they weren't round enough, others for having too much glaze, and maybe even a few for not having a hole at all.

There are at least two key similarities between Krispy Kreme and a well-run investment committee: Employees usually perform more than one function, and criteria should be used to monitor the product, throwing the underperformers away.


The investment committee members will have other primary jobs--as staff members, faculty, and other professionals. Therefore, watching over the plan should be an attainable task. Is it reasonable to think that an investment committee can watch over hundreds of investment choices? Probably not. Each investment choice should be monitored for quantitative, and qualitative measures alike. If you already have an investment committee, ask these questions to gauge their knowledge of each investment choice:

1. How has the performance been of each investment compared with other funds that invest in a similar fashion, over differing time periods?

2. If an investment outperformed or underperformed, why? Extra risk? A lucky or unlucky year of extreme out-performance or underperformance? Style drift?

3. How long has the manager been at the helm?

4. What is the culture at the home office of the investment manager?

5. Is it a large corporation, or is it a boutique firm?

6. Do they focus on many disciplines or a specific area?

7. How does a particular investment option correlate to the others?

8. Is there adequate diversification for most risk tolerances?

9. Are there enough choices to provide diversification, but not too many so as to confuse the participant?

10. What are the fees associated with each choice? Also, how does this plan compare with other plans having a similar size? And how much of the fee is paid by the participant? By the sponsoring organization?

Keep the investment choices down to a reasonable number; I suggest no more than 20. This will allow for an adequate amount of diversification, while giving the participants a fighting chance to understand their choices. It will also help the investment committee track these choices.


No matter how meticulous the processes for baking doughnuts, there will always be an occasional reject. At Krispy Kreme, it is simply thrown away. The same should be true for the investments in the plan. When choosing an acceptable investment lineup, the process can be extensive and should be documented well. However, investment management is a fluid process; managers leave, styles change, performance waivers, amongst many other factors. Don't fall in love with your choices! Monitor those investments. If underperformance persists, try to identify the reason. If the choice continues to lag beneath an acceptable level, replace it with a suitable alternative. Once again, have only as many investment choices as the committee can monitor effectively.


This question has both practical answers and sobering ones. On the practical side, an institution should operate its retirement plan according to ERISA so it can offer an acceptable retirement vehicle amidst the possible turmoil in Social Security, pensions, and so on. Also, getting participants involved and excited about retirement can raise morale and employee retention.

The sobering answer is this: Operating your plan according to 404(a), offering an acceptable menu of investments (with a process to monitor them), and working within 404(c), a set of guidelines which includes allowing your participants to choose their own investment mix, will go a long way in shielding the fiduciaries and trustees of the plan from participant-directed lawsuits. If you choose not to follow ERISA guidelines, those same fiduciaries and administrators may become personally liable.

Coordinate with a 40l(k) consultant or advisor and a good ERISA attorney to find out whether your plan complies with these rules. If there is quality control at Krispy Kreme for something as simple as a glazed doughnut, certainly the retirement hopes and dreams of your participants and their need for a well-run retirement plan deserve quality control as well.

Todd Barrow is president of Barrow & Powers Financial Services and registered principal with Raymond James Financial Services in Lakeland, Fla. He can be reached through the website
COPYRIGHT 2006 Professional Media Group LLC
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:VIEWPOINT
Author:Barrow, Todd
Publication:University Business
Date:Dec 1, 2006
Previous Article:Bush taps Gates for cabinet post.
Next Article:A new breed of American energy colleges and universities: efforts to conserve energy and explore alternative power sources reflect the greening...

Related Articles
The hole truth: what you don't know about doughnuts.
Riding the highs and lows: experiencing tough times is teaching MMIC to be better investors.

Terms of use | Privacy policy | Copyright © 2022 Farlex, Inc. | Feedback | For webmasters |