Retirement plan governance is the system through which key decisions are made about strategy and operations, including plan design, administration and investment choices. Typically, at the core of plan governance is an official plan governance committee. Although the Department of Labor (DOL) and IRS do not require a plan to have a plan governance committee, it is considered a best practice to have one.
Addressing key questions
Simply having a committee is not enough. The plan governance committee’s charter and manner of operation are at the heart of sound plan governance. A retirement plan governance committee’s charter sets out the committee’s goals and responsibilities. It should include ERISA’s specific fiduciary principles, such as managing the plan for the exclusive benefit of participants; acting with the care, prudence, skill and diligence that a knowledgeable person would use in a similar situation; adhering to the plan document; and ensuring proper diversification of investment options.
According to the Retirement Learning Center, an ERISA and IRA consulting services firm, the charter should include the following:
- The committee’s purpose and authority, including whether the committee can delegate its authority and purpose;
- The committee’s structure, including who serves on the committee and how members are replaced;
- The assignment of duties and responsibilities, including what reports the committee will produce and to whom those reports will be sent;
- The frequency and structure of committee meetings, including standing agenda items and how new topics are introduced; and
- The procedures for protecting committee members financially.
The charter should also cover the process for selecting and managing plan service providers. Each committee member should sign the charter, stating that he/she understands his/her responsibilities as a plan fiduciary and consent to being named to the committee.
Creating an effective plan governance committee
Retirement plan governance committee members are generally named by the corporate board, which also approves the committee’s charter. Although the board delegates authority for making decisions outlined in the committee’s charter, the board cannot shed its fiduciary responsibility by establishing a committee. Therefore, provisions need to be made for the committee to keep the board informed of its activities and to approve its recommendations on key issues.
A retirement plan governance committee will be influenced by the size of the plan sponsor, its management philosophy, the complexity of the retirement plan and participant demographics. When establishing your retirement plan governance committee, consider:
The board should have members who are knowledgeable in investment, financial and HR issues. The DOL looks to the experience and background of committee members to determine if they have the appropriate knowledge to make plan decisions.
Top management should be represented and play a key role, given the high level of the committee’s responsibility. The charter could define the leadership structure, such as by naming the company’s CFO as the ex-officio committee chair.
The challenge is to find the right size. A large committee can become unwieldy and dilute a sense of responsibility. A committee that is too small can have a lack of diverse perspectives and create an undue burden on certain members. Also, consider having an uneven number of committee members to avoid any voting ties.
Depending on the committee size and the amount of work it needs to accomplish, creating one or more subcommittees, such as one focusing on plan investment performance, might be advisable. However, a typical plan sponsor has one committee that is responsible for all aspects of the plan, including investments and plan administration.
- Meeting Frequency
The need for meetings may change over time depending on the issues being addressed. Meeting on a quarterly basis is generally sufficient to maintain continuity and facilitate the introduction of new issues that need to be addressed.
While committee members need not all be retirement plan experts, they should receive some form of training on retirement plan operations and understand their roles as fiduciaries. In a DOL investigation, the DOL often will look at the frequency of fiduciary training for plan governance committee members. Annual training is highly recommended.
The charter should provide for the removal of committee members who fail to attend meetings regularly or otherwise demonstrate a lack of commitment to their roles.
Committee actions and recommendations should be recorded in minutes and those minutes should be documented and maintained.
- Term Limits
Except for ex officio positions, committee members should be periodically replaced to prevent burnout and ensure fresh perspectives.
Cover your bases
There is more to retirement plan governance than establishing a committee, but a strong charter lays the proper foundation. We recommend you have an independent expert, such as an ERISA attorney, review your governance structure to ensure that you have covered all requirements.
Sidebar: Procedural prudence and plan governance committees
Complying with ERISA’s “procedural prudence” principle requires your plan to have a strong governance framework. ERISA requires 401(k) plan fiduciaries to exercise their authority “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” This standard governs all 401(k) plans and means that plan governance committee governance is also subject to the rule.
Retirement plans that operate without a coherent governance structure are vulnerable to mismanagement and inconsistent performance, possibly leading to legal liability for poor decisions. By creating an effective plan governance committee, your plan will help ensure that it is complying with ERISA’s procedural prudence principle and is operating effectively for the benefit of the plan’s participants.
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For more information, contact Jim Quaid at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.