Establishing a Retirement Plan Committee

Plan sponsors need to establish who will be responsible for plan administration and plan and investment decisions.

Carol Buckmann, co-founding partner at Cohen & Buckmann P.C., says committees aren’t legally required, but if plan sponsors appoint a committee as a “named fiduciary,” as defined in the Employee Retirement Income Security Act (ERISA), they will not only see it pay more careful attention to plan issues, but a company’s owner or board of directors will be relieved of most responsibilities for the plan. The owner’s or board of directors’ responsibility would be limited to prudently appointing committee members and monitoring their overall performance, she says.

Having a committee or committees can greatly help with defense if a plan or plan sponsor is sued, Buckmann adds.

“We say a committee is necessary,” says Millie Viqueira, executive vice president and manager of Callan’s Fund Sponsor Consulting group. “There are instances in which we see a sole trustee responsible for the plan, but the most common approach is a committee because—at a basic level—there needs be someone making sure the plan is managed according to ERISA and state or local guidelines.”

Viqueira says the most common instance in which there would be a sole trustee responsible for a plan is with public pensions, such as the New York State Common Retirement Fund. “However, the norm for both corporate and public retirement plans is to have a committee,” she adds.

Viqueira says retirement plan committee members’ rules and responsibilities are set out by a committee charter or investment policy statement (IPS). When committees get together, they make sure the plan is managed in a way that is consistent with the culture of the organization and existing laws and regulations, she says. The committee determines how to do this in a way that meets the plan sponsor’s fiduciary responsibilities.

Committees are also typically responsible for setting the plan’s asset allocation or investment policy and making sure the policy is being adhered to, Viqueira says. Committees are also responsible for the selection and monitoring of plan providers, including asset managers, custodians, recordkeepers and consultants or advisers. The committee manages all this with an eye toward creating good outcomes while mitigating risks, Viqueira adds.

For defined contribution (DC) plans that need to be ERISA Section 404(c) compliant, committees also ensure participant communications are available, and that clear and appropriate notifications are provided to participants, Viqueira says. “This is in addition to making sure the plan offers the right building blocks for participants to create effective investment portfolios,” she says.

Larger plan sponsors often appoint both administrative and investment committees, but Buckmann says she has seen one committee handle both duties effectively. More recently, larger employers might even set up settlor committees to handle things such as plan design decisions that aren’t treated as fiduciary decisions.

Individuals making settlor decisions are protected from ERISA’s fiduciary duty to act in the best interest of participants, Viqueira notes. On the other hand, individuals making plan investment decisions must do so with the best interest of the plan and its participants in mind, and they are fiduciaries.

Viqueira says she has one client that bifurcates its committee agenda to make clear which items are settlor decisions and which items are fiduciary decisions.

Committee members are often corporate officers, usually including the chief financial officer (CFO) and a representative from human resources (HR), Buckmann says. But if the plan holds company stock, it may be advisable to appoint an independent fiduciary rather than the top executives.

Viqueira says committees also often have some representation from the corporation’s legal team. She says that sometimes the legal representative is a voting member, but sometimes he is not and he just acts as a recording secretary. Other committee members could be from major departments. For example, Viqueira says, if the plan sponsor is a sales organization, it might include someone from the marketing department or business development team on the committee.

“Committees need broad representation without becoming unwieldy. Five to seven members is the sweet spot,” she says.

When considering committee members, it is important to have low turnover, Viqueira says. “Continuity of perspective is important. I’m not saying it should be like the Supreme Court, where terms are for life, but terms could be staggered so there is always a core group of people with institutional memory,” she explains.

Viqueira adds that having a dedicated committee staff is helpful, but it is not always doable, especially in the smaller plan market. Most committee members have to do their “day jobs” as well.

It is important to appoint people with a willingness to learn—since nobody is born knowing the ERISA rules—and people with the time to do the job properly, Buckmann says. It is also important to select people who will consult or appoint experts when they lack the expertise to handle matters, such as choosing plan investments. That is what ERISA requires.

Plan sponsors should select committee members who will be patient and are willing to own their decisions, Viqueira says.

Plan sponsors should also prepare to educate committee members. “There is fiduciary training for new and existing committees,” Viqueira says. “Plan sponsors should carve out time on an ongoing—maybe quarterly—basis for some kind of committee training.”

She says training is needed in both the corporate and public plan settings. “There may be a public fund committee made up of teachers or police officers, and retirement plan decisionmaking is not their day job,” Viqueira explains. “They need to understand their responsibilities and the correct process to be able to separate their personal views from what is best for the plan and its participants.”

Fiduciary liability insurance is always optional, Buckmann says. ERISA generally requires anyone who handles plan funds to be bonded. “So, if the committee members engage in activities such as transferring money, signing checks or authorizing payment of expenses or benefit distributions, they would be handling funds and required to be bonded,” she explains.

But Viqueira says it would be a challenge to get individuals to stick their necks out if the plan sponsor doesn’t secure fiduciary liability insurance.