Why Retirement Plan Committees Are a Best Practice

Having a retirement plan committee is not a legal requirement for plan sponsors. However, it’s considered a best practice. In the absence of a committee, by default the corporation itself becomes a fiduciary — an amorphous proposition. Should you consider forming a committee? Let’s take a closer look at the benefits.

Creating an Effective Committee

Retirement plan committees tend to fall into two categories: (1) an unbiased collection of people who hold periodic rubber-stamping gatherings, or (2) an engaged governing mechanism safeguarding the plan participants’ interests and fulfilling its fiduciary obligation. How can you ensure yours is the latter?

Start by making sure potential members fully understand the role of the committee, its fiduciary status and the implications of being a fiduciary. Members should sign a document accepting their nomination on the committee. Be clear about the legal consequences of failing to properly manage the plan. Cultivate an optimistic attitude by reminding the members that they play a critical role in the success of the retirement plan. For many employees, this is one of the only vehicles they have toward saving for retirement.

Organizing the Committee

The two most common reasons to form a retirement plan committee are:

  1. Help the plan select and monitor vendors
  2. Avoid ERISA compliance breaches

Both are ripe for possible litigation. For example, given ERISA’s complexity, unintended noncompliance can occur. Considering these risks, properly setting up the committee is crucial. To start, establish a charter. These are similar to corporate bylaws. Charters should:

  • Describe the committee’s authority and responsibilities
  • Establish how members can be nominated, terminated and replaced
  • Determine how often the committee will meet (quarterly is recommended)
  • Identify its members, typically by title rather than name (to avoid numerous charter amendments as people move in and out of specific jobs)

Be realistic about the charter’s components, such as the frequency of meetings. For some matters, routinely violating the charter may put you at greater risk than not having one in the first place.

In addition to overall committee duties, it’s helpful when members have specific areas of responsibility on the committee. This can help avoid having important matters go unaddressed. But remember, even though a committee with individual member responsibilities limits the possibility of lapses, it doesn’t provide assurance that lapses won’t occur.

Establishing an IPS

If the committee’s mandate covers overseeing plan asset investments, it should create and enforce an investment policy statement (“IPS”). The IPS should strike a balance: the more narrowly you define the policy, the more you tie your investment managers’ hands. On the contrary, an overly broad IPS may increase the chances that investments will stray into hazardous territory. The IPS should describe how the committee will monitor plan investments’ actions relative to that policy statement.

ERISA holds plan fiduciaries to a high standard of prudence. For example, it’s not sufficient to oversee the investments in your plan’s retirement portfolio the same way you manage your personal investments. Thus, the committee charter should include standards for the hiring — and firing — of qualified professionals to help the committee assume its responsibilities.

Even so, ERISA enforcement generally places an emphasis on sound (and prudent) decision-making processes, rather than results. For example, if the retirement committee follows a thorough screening process for choosing an investment manager, and that manager subsequently underperforms, a court will generally find that plan fiduciaries acted prudently. However, if the committee failed to act when the investment manager deviated drastically from the agreed-on investment strategy, courts may not be so forgiving.

Documenting Committee Actions

Documentation of the committee’s actions is critical. Remember, in a litigation situation, the lack of committee minutes highlighting its discussions and decisions leaves the committee on thin ice. The lack of minutes can also deliver the message that plan oversight isn’t up to an adequate standard. A Department of Labor auditor may consider this in an investigation or review.

However, the existence of minutes alone doesn’t guarantee that fiduciaries and committee members will be cleared of misconduct in a litigation or an investigation. Rather, the content of the minutes matters. Make sure your committee meeting minutes are based on the author’s contemporaneous meeting notes, not compiled from memory days later. Similarly, distribute and approve minutes soon after the meeting has taken place while the attendees’ memories are fresh.

Because the minutes may be read someday by an opposing attorney or federal auditor, they must be precise and stick closely to the basic facts. This includes the core elements of discussions and what decisions were made, and not a blow-by-blow reporting on all that was said. Not only would that hold the potential to provide ammunition for opponents in a litigation, but it would make minutes less useful to committee members.

Is it That Time?

Remember, if a committee member has any control over plan management or its assets, that member is considered a fiduciary. If you do not have a plan committee in place, now may be the time to do it.

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