Offering and running a robust 401(k) plan is one of the most important benefits a company can offer its employees. It is also one of the most taxing responsibilities for business owners and plan sponsors to take on, with a very real potential to become an overwhelming liability. That’s why an important step in offering and managing an efficient plan is establishing a retirement plan committee to aid in decision making, accepting fiduciary responsibilities and serving as a solid backbone for the structure of your plan.
While there is no set-in-stone formula for creating a retirement plan committee, our experience working with organizations of different sizes and types has helped us identify a series of consistent factors that contribute to committee success.
Why a Retirement Plan Committee is Necessary
Managing a retirement plan is a large responsibility that often times involves employees from different divisions of an organization. Given the potential liability associating with the plan, it is considered best practice for an organization to form a committee, or multiple committees to oversee the management and governance of the plan. This Committee forms the basis for the procedural prudence that will govern the plan.
Forming a committee has several advantages, but most importantly it formalizes and centralizes decision making about the plan. ERISA stresses a prudent process should be followed, which is difficult to do if there is no clear entity responsible for the management of a plan.
The Difference Between a Committee and a Formal Committee
There is a significant difference between a group of employees who get together to make decisions about a plan and a plan committee. This is something we see often.
Let’s assume that the CFO, VP of HR and Payroll Director from ABC Company all meet quarterly to make decisions on the plan collectively. The committee has no formal charter, bylaws and no minutes are taken. This is what is called an ad-hoc committee. While it is technically a committee, it really has no authority to make decisions on the plan, because ABC Company has not given it any authority.
Why is that bad? In reality, when this committee makes a decision, it is really making a recommendation to the management of ABC Company, who is the named fiduciary with the authority over the plan. ABC Company is making the ultimate decision. Given that the CEO was not in the meeting, is it prudent that he or she sign off on the decision without due diligence?
In order for a committee to be completely effective, it must be formalized. This is done through a charter from the sponsoring organization. The charter formally delegates the responsibility for the decision making on the plan to the committee.
How Many Members is Too Many?
The size and structure of the retirement plan committee often reflects the size and complexity of the plan itself. Larger, more complex plans may require more committee members in order to facilitate plan business, while smaller plans may require fewer committee members. In some instances, larger organizations may even create multiple committees that are charged with administrative, regulatory compliance or investment responsibilities.
There is no one correct committee structure for all plans. It is important that an organization considers its needs and resources when making this decision. Typically we see committees with between two to four members on smaller plans and five to seven members on larger plans.
Who Should Serve on the Committee
When setting up a committee, members are most often senior management personnel from the areas of human resources, finance and operations. An organization should select committee members who can confidently be expected to understand and respect ERISA’s fiduciary standards. Committee members are not required to be experts in retirement plans or investments, but they should be qualified in some way to serve on the committee and willing to work toward the common objective of satisfying ERISA’s stringent standards.
Since committee members become plan fiduciaries by virtue of their committee membership, the board may choose to indemnify committee members from the personal liability that often emerges in the event of a breach of fiduciary responsibility. In any event, committee members should always accept and acknowledge their fiduciary roles in writing.
Operation of a Committee
Committee members should be educated on the basics of ERISA, including: fiduciary duties, plan procedures, investment review guidelines and plan documents. They should also be given an explanation of the fiduciary obligations and liabilities that are implicit in the acceptance of committee appointment.
One best practice to appoint a chairman to run the meeting and a secretary to keep minutes. The secretary may also serve as the official custodian of the plan documents and committee records. If structured properly, this person can be responsible for having signatory authority over the plan.
Plan committees, like all committees, should adopt a set of bylaws by which to operate.
Committees should generally meet quarterly, unless the situation warrants more frequent meetings. At an absolute minimum, committees should convene twice per year.
Contact our team of retirement plan advisors to learn more about managing an efficient retirement program with a complimentary plan review.