Art by Joseph CiardielloIn our last column, “A Complex Role,” we discussed the importance of committee members understanding the retirement plan’s governance structure. In this column, we provide guidance about who should be part of the retirement plan committee.
There are no specific legal requirements regarding the number of members or who should or should not sit on the committee.
However, there are common practices plan sponsors might keep in mind that can serve as guidelines for establishing this body.
Typically, a committee consists of three to seven people. This often varies depending on the size of the company and the plan. There may be one or more nonvoting members from human resources (HR) who serve as secretary or attend to provide additional information concerning delegated administrative duties. The secretary’s duty is to take and maintain minutes of the meetings—an important and vital component of documenting the committee’s fiduciary procedures and decisions.
When selecting committee members, one of the most important qualities to look for is willingness to be involved—to attend meetings, review meeting materials in advance, ask tough questions and engage in discussions and decisions. Members need to understand their duties and be committed to active participation, otherwise it becomes difficult for the committee to act prudently. It is also important that they fully understand their fiduciary role when agreeing to join.
Committee members should also be employees with education and experience consistent with evaluating plan investments, reviewing service providers and considering plan administration. If they lack specific experience, outside help can be obtained. For example, most committee members do not have specific investment expertise. This can be addressed by employing an outside investment adviser who can provide advice, recommendations and education to the members. Note that this does not mean the committee should just rubber-stamp whatever the expert adviser recommends. Rather, the members should utilize the adviser for better understanding the issues and making appropriate decisions.
Additionally, including a short educational component—e.g., such as legal updates—at each meeting, plus annual fiduciary training, will help committee members have the background they need to make plan decisions.
Often a committee will include one or more of the following management team members: the vice president of HR, the chief financial officer (CFO) and/or the director of compensation and benefits. Typically, the president or CEO is not included as a member because he may have too many significant other responsibilities and too little time. Moreover, if the plan holds company stock, the CFO may be excluded to help avoid conflicts resulting from stock knowledge he has that can’t be discussed under applicable securities laws. Alternatively, a committee may appoint an outside third-party fiduciary to make decisions with respect to any company stock.
We generally recommend that committees not include the company’s general counsel for membership and instead have that person or someone in the legal department serve as an adviser to the committee; this will help preserve the attorney/client privilege to the greatest extent possible. Once the committee is selected, one person should serve as the chairman to oversee the meetings and keep them on track.
Appointing, monitoring and replacing, as necessary, the committee members is a fiduciary responsibility. Whoever is responsible—whether the board or its delegate—committee member appointments should be periodically reviewed. This means the fiduciary should assess whether the members continue to act appropriately—i.e., attend meetings and actively participate in committee decisionmaking. Further, the fiduciary should be prepared to fill empty committee seats as people change employment positions or leave the company.
Some committees impose a term limit to avoid having complacent individuals hold their seat indefinitely. However, this should be balanced against the benefit of continuity and having more permanent members who understand their fiduciary obligations and the duties of their position.
Summer Conley is a partner in the Los Angeles office of Drinker Biddle and Reath LLP, and Michael Rosenbaum is a partner in the firm’s Chicago office. The two attorneys’ work with retirement plan sponsors and their internal investment/administrative committees to help them understand and implement best practices for qualified plan work, executive compensation, and health and welfare issues, in respect to fiduciary and government regulations.