Art by Joseph CiardielloCongratulations! You have been appointed by your CEO to be a member of your company’s retirement plan committee. Being a plan committee member is not an easy job in today’s world of increasing government audit activity and class action litigation against 401(k) and 403(b) plans. You are being asked to be a “fiduciary” under the law but have likely received little or no training on what to do next.
Your first step in becoming a plan committee member—and therefore a fiduciary—is to review the governance structure for your company’s retirement plans and your place in it. The Employee Retirement Income Security Act (ERISA) imposes specific responsibilities on you when you act as a fiduciary. Among the most important of those are: 1) engaging in a “prudent” process, and 2) following the terms of your plan documents. It is important to do both, as it can be a breach of fiduciary duty if you don’t have a prudent process for making fiduciary decisions or if you don’t follow the written process outlined in your retirement plan documents. A prudent process starts, and can be enhanced, by creating and documenting a good governance process for your retirement plans and then following that process.
The governance structure for your retirement plans is likely described in several different documents such as:
- The plan document for each retirement plan for which your committee is responsible—these should be found in the fiduciary or administrative section near the end of the plan document;
- Your company’s bylaws, which may contain specific references to a committee that has responsibility for the administration and/or investments of the company’s retirement plans;
- Any separate board of director resolutions delegating authority or responsibility with respect to a retirement plan;
- The charter for your retirement plan committee, if one exists. This document is used by the board of directors to delegate and outline committee responsibilities and duties; and
- The investment policy statement (IPS) describing the process for selecting and monitoring the investments under each retirement plan.
As a committee member, you should be aware of, and familiar with, each of these documents. They are the legal documents describing your role as a member of the retirement plan committee for: 1) fiduciary functions—i.e., selecting and monitoring plan service providers and investment options, and deciding administrative issues—and 2) nonfiduciary functions—i.e., plan design and amendment authority.
We recommend reviewing the relevant plan documents, including those outlined above, for each fiduciary and nonfiduciary responsibility and preparing a chart graphically showing who has each of these responsibilities. It is also important to make sure the governance language in each document is consistent among all of them, and consistent with the actual operation of the plan. In other words, the documents should all describe the same governance structure, and that structure should be consistent with what is really happening. Once this is accomplished, you and the other members of the plan committee can review your role in the overall governance structure of each retirement plan. Steps we suggest are to:
- See if changes should be made to that governance structure to reduce compliance risks and liabilities for the board, the plan committee and everyone else involved in the operation of the retirement plan;
- Discuss how to best train the retirement plan committee members and others involved in the plan governance process; and
- Discuss the most efficient method to update the governance documents, to adjust for any suggested changes or improvements.
We have attended hundreds of retirement plan committee meetings, usually providing legal support and/or fiduciary training to the committee and its members. In future columns, we will share with you more lessons we have learned from these meetings and offer our thoughts on steps you can take to become an effective committee member.
Summer Conley is a partner in Drinker Biddle’s Los Angeles office, and Michael Rosenbaum is a partner in the firm’s Chicago office. Both assist clients in a variety of employee benefit areas. Their work with retirement plan sponsors and their internal investment/administrative committees includes helping them understand and implement best practices for qualified plan work, executive compensation, and health and welfare issues, in respect to fiduciary and government regulations.