Helping Fiduciaries Sleep Well at Night
By Christine Moehl
Managing a company’s retirement plan is a challenging job, too often delegated to one or two employees within the company who may have neither the time nor the skills for the task. These employees are considered “plan fiduciaries” under the Employee Retirement Income Security Act (“ERISA”).
The four duties of a plan fiduciary are: (1) to operate the plan in the best interests of the plan participants and their beneficiaries; (2) to act with the care, skill, prudence and diligence that a knowledgeable person familiar with such matters would use in overseeing the plan; (3) to operate the plan in strict adherence with the plan documents; and, (4) to manage the investment options available under the plan and/or offer the participants a diverse range of proper investment options to choose from. More specific duties spring from these four general duties. To name a few, plan fiduciaries must monitor and oversee the plan’s service providers; must make certain that the fees charged to plan participants for investment and administrative services are reasonable; must make sure that the plan documents remain in compliance with changing tax laws; and must respond to participant claims in strict adherence to the plan’s claims procedure as mandated under ERISA. All of these duties combine to make the fiduciary standard of care under ERISA one of the highest fiduciary standards in American law.
Because of the high fiduciary standards under ERISA and the potential for personal liability and civil penalties when those standards are not met, more employers are establishing formal retirement plan committees. Establishing a retirement plan committee does not, in itself, relieve a business owner of all liability under ERISA. However, if the committee is well run, it does ensure that the decisions affecting plan administration and plan investments are made in a regulated environment, lessening the risk of a mistake. The following are five important questions that an employer should address when establishing a retirement plan committee:
1. What is the function of the committee?
Designated fiduciaries must oversee the administration and investments of the plan. When a committee is the designated fiduciary, most employers empower the committee to oversee both plan administration and plan investments. However, some employers opt to create two sub-committees: a plan administration committee that monitors how the plan is operated, and a plan investment committee that monitors the plan’s investments. Each committee’s scope of authority should be outlined in a committee charter. A charter will commonly empower the committee to select and monitor the plan’s service providers, select and monitor plan investment options, monitor plan fees, and amend the plan document for required tax law changes.
2. Who should serve on the committee?
The size of the committee often reflects the size of the plan – smaller plans generally have smaller committees and larger plans have larger committees. Most commonly, the members of the committee are employees from the company’s human resource, finance, and management departments. All committee members are fiduciaries to the plan, so it is important that they are familiar with plan administration and investment issues. Committee members should also be informed of their fiduciary status and, under ERISA, must acknowledge that status in writing by accepting appointment to the committee. In selecting the members of the committee, it is important to avoid conflicts of interest. For example, anyone who is paid a fee from the plan (e.g., an investment advisor or consultant) or who is related to an individual who is paid a fee from the plan should not serve on the committee. The charter should recite the members of the committee, either by name or by title.
3. How often should the committee meet?
Although ERISA does not specifically state how often designated fiduciaries must meet to perform their duties, most retirement plan committees meet quarterly. This is because the U.S. financial industry runs on a quarterly basis and most service providers and financial consultants routinely produce quarterly investment reports. Because review of these investment reports is a core obligation of the committee, quarterly meetings are natural. However, some employers with smaller or less complex plans choose to hold formal committee meetings on a semi-annual or annual basis. Although these committees have formal meetings less frequently, it is important that committee members review the plan’s quarterly investment report each quarter. In addition to regularly scheduled meetings, the Chair of the committee should have the authority to call interim meetings. Interim meetings are often necessary in the event of sudden market shifts or company transactions that affect the plan. The committee charter should set the frequency of committee meetings, define a committee quorum, and address meetings by email or teleconference.
4. How should the meetings be documented and structured?
Every committee meeting should be documented with minutes that are reviewed and approved by the committee. These minutes should not be word-for-word transcriptions of the meeting itself, but should instead summarize the topics discussed at the meeting and include the rationale for any decisions that were made. If the plan is audited by the Department of Labor (“DOL”), the DOL will ask for copies of the minutes to determine if the plan fiduciaries have met their fiduciary duties under ERISA. Remember that because committee members have a fiduciary obligation to act in the best interests of the plan participants; committee meeting minutes are not confidential information and can be obtained by plan participants.
Committee meetings typically begin with review and approval of the prior meeting minutes, followed by review of the plan’s investment performance, including decisions on any changes to the investment lineup. Next, the committee will typically discuss plan administration issues, such as nondiscrimination testing results, required participant notices or disclosures, and disposition of pending participant claims. Most pension committees invite the plan’s legal counsel to attend committee meetings and report on legal and regulatory compliance topics, provide fiduciary guidance, and train new committee members on their fiduciary duties. On at least an annual basis the Committee should undertake a thorough review of plan fees, plan design, and service provider performance.
5. How can the employer protect the committee members from personal liability?
The committee charter will typically include provisions stating that the employer will indemnify and hold harmless all committee members from any claims brought by participants as a result of the committee member’s actions or inactions. Including these provisions in the charter encourages employees to agree to accept appointment to the committee. Many charters preclude indemnification when a committee member wilfully engages in misconduct while serving on the committee. In addition, some employers (especially large employers) will purchase fiduciary liability insurance covering both committee members and officers of the company.
If you want to create a retirement plan committee to serve as the designated fiduciary to your plan, or want assistance in drafting a committee charter, please contact our Employee Benefits Group.