Though ERISA does not require a committee for the company sponsored retirement plan, having a well trained and organized committee can contribute to prudent decision-making regarding plan administration, investment selection and oversight. A well-functioning committee can also significantly reduce burdens and liabilities that would otherwise fall solely to the sponsor.
Collective Wisdom and Prudence
It stands to reason that the combined knowledge and perspectives of several individuals can lead to more informed decision making on behalf of plan participants and beneficiaries. Indeed, well-run committees contribute to achieving ERISA’s “prudent person” standard, ensuring that all choices are made through deliberate and thoughtful processes. Since ERISA litigation continues at a record-pace, taking 401k plan governance ever more seriously is critical, and, retirement professionals at Plan Sponsor observe that although ERISA does not mandate a committee: “Prudent practice is to have a three- or five-member committee, potentially including representatives from human resources, finance or treasury, and information technology.”
Serving on a retirement plan committee is not a role to be taken lightly. Indeed, plan sponsors and committee members must keep the inherent nature of their fiduciary obligations front and center, knowing that they are held to an exceptionally high standard of law:
“Under ERISA, the concept of being a fiduciary is a functional one,” says Julie K. Stapel, a partner in Morgan, Lewis & Bockius. “That means if you do things that make you a fiduciary, then you are one, regardless of whether you intended to be or if your governing documents say that you are. That’s why governance is so important.” Anyone who has discretionary authority and control over plan assets or plan administration is a fiduciary, and that typically includes all members of a plan committee. Plan fiduciaries must act in the best interest of the plan participants and beneficiaries.
At CAPTRUST, Michael Webb underscores that serving on a retirement plan committee is a serious responsibility, and involves being familiar with the actual plan document, as well as supporting documents such as service agreements, the committee charter, and investment policy statement: “You really need to act and think about everything as whether you’re maximizing the retirement benefit for participants and beneficiaries….A good committee meeting is a meeting that references plan documents more than plan investments….That’s how important they are.”
According to Plan Sponsor, best practice for solid committee work also involves keeping detailed minutes, which document not just what decision was made, but also the process used to reach the decision: “Since ERISA rules focus primarily on prudent processes, committees should meet regularly and document their meetings with minutes that show they have made decisions about investments or hiring service providers after discussion and considering different points of view. Prudent practice for minutes is to include a summary of discussions.” Toward the documentation of prudent process, Jodi Epstein of Ivins, Phillips & Barker counsels: “Rather than having an open-ended conversation, you want to have some closure, saying that the committee agreed to make a change or not make a change….Don’t say they’re going to revisit the issue if they’re not going to revisit it. Don’t put stuff in the minutes you can trip over later.”
Of course training to ensure each member of a 401k committee understands their fiduciary duties is also essential. For example, a common governance practice is to convene a retirement plan committee twice each year, with one meeting specifically focused on fiduciary training. Some committees meet four times a year, and in tandem with the training, it’s even possible to run through compliance checks and balances in real time, reviewing data, and “comparing…plan fees and best practices to those of competitors….”
An Ounce of Prevention: Protection Is Best
Retirement plan sponsors and committee members must understand what’s at stake should their fiduciary failures result in losses to participants:
Making prudent fiduciary decisions for the plan involves staying informed and monitoring recordkeeping, administration and investment fees….Sponsors should know that “[plan] fees don’t have to be the lowest, but they need to be competitive and benchmarked, also, with the services provided….Individuals who serve on a retirement plan committee take on the role of plan fiduciary. Were the plan to violate ERISA and face legal action, committee members could be personally liable to restore any losses to the plan or to restore any profits made through improper use of plan assets…
Given the personal risks involved in serving as a fiduciary, it’s best for plan sponsors and other fiduciaries to be protected against lawsuits, and fiduciary liability insurance is the only coverage that does so. Though required, ERISA Bonds protect the plan and participants—not the sponsor or other fiduciaries. To help retirement plan sponsors mitigate their personal risks, Colonial Surety Company offers affordable fiduciary liability insurance, and includes basic cyber liability insurance–which explicitly covers the business and plan–at no extra cost. For a few dollars a day, our Fiduciary+ Cyber Liability Insurance package arms plan sponsors with:
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Protection for Retirement Plan Sponsors