Having a retirement plan committee isn’t 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 A Productive Committee
Retirement plan committees tend to fall into two categories: 1) a disinterested collection of people who hold periodic rubber-stamping sessions, or 2) an engaged governing mechanism safeguarding the plan participants’ interests and fulfilling its fiduciary mandate. How can you make sure yours is the latter?
Start by making sure potential members fully understand the role of the committee, their fiduciary status and the implications of being a fiduciary. Members should sign a document accepting their appointment on the committee. Be clear with them about the legal consequences of failing to properly oversee the plan. Cultivate a positive 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 to:
- Help the plan select and monitor vendors, and
- Avoid ERISA compliance breaches.
Both are ripe for possible litigation. For example, given ERISA’s complexity, inadvertent noncompliance can occur. With these stakes, 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,
- Lay out how members can be named and replaced,
- Set how often the committee will meet (quarterly is recommended), and
- Identify its members, typically by title rather than name (to avoid frequent charter amendments as people move in and out of particular jobs).
Be realistic about the charter’s elements, 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 responsibilities, it’s helpful when members have specific areas of responsibility on the committee. This can help avoid having important matters go unnoticed. But remember, even though a committee with individual member responsibilities limits the possibility of lapses, it doesn’t guarantee that lapses won’t occur.
Establishing An IPS
If the committee’s mandate covers overseeing plan asset investments, it should establish 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. In contrast, 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 generally 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 criteria for the hiring — and firing — of qualified experts to help the committee undertake its responsibilities.
Even so, ERISA enforcement generally places an emphasis on sound (and prudent) decision-making processes, rather than outcomes. For example, if the retirement committee follows a thorough vetting process for picking an investment manager, and that manager subsequently delivers disastrous performance, a court will generally find that plan fiduciaries acted prudently. However, if the committee failed to act when the investment manager deviated radically 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 absence of committee minutes highlighting its deliberations and decisions leaves the committee on thin ice. The lack of minutes can also convey the message that plan oversight isn’t up to an adequate standard. A Department of Labor examiner 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 wrongdoing in 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, circulate 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 accurate 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 litigation, but it would make minutes less useful to committee members.
It Is Time For A Committee?
Remember, if a committee member has any control over plan management or its assets, that member is considered a fiduciary. If you don’t have a plan committee in place, now may be the time to create one.