Establishing a Retirement Plan Committee

Why plan sponsors need a committee, what committees do and who to appoint to a 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.

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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.

Effects of COVID-19 Could Spark More Retirement Plan Litigation in 2021

Industry experts say market volatility and cybersecurity issues could lead to new lawsuits.

Plan sponsors should keep a close watch on retirement plan litigation, as the effects of COVID-19 might spark new lawsuits.

The market volatility experienced in March and April, coupled with the cybersecurity risks of remote work, could position some employers to face litigation in the new year, industry experts say.

Smaller businesses, which normally lack the resources to invest in multifaceted cybersecurity measures and are therefore susceptible to cyber breaches, may be at risk, says Jordan Mamorsky, an ERISA [Employee Retirement Income Security Act] litigation attorney at the Wagner Law Group. “Smaller plans have a harder time investing in more robust cybersecurity measures, just because of their resources,” he says.

Mamorsky predicts potential guidance from the Department of Labor (DOL) on cybersecurity measures could ease concerns. In September, the Wagner Law Group submitted a letter to the DOL requesting “comprehensive cybersecurity guidance” on questions about confidential information, a plan administrator’s responsibility and more.

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However, until the DOL issues such guidance, small and large employers alike should be aware of their cybersecurity risks. “Because it is so unchartered from a regulatory perspective, and because we’ve seen such growth from criminality in this cyber arena for small and large employers, it will be a major problem,” Mamorsky says.

Gregory Kasten, founder and CEO of Unified Trust Co., says he anticipates a more active DOL in 2021 under President-elect Joe Biden’s administration. However, this might open the door for new litigation, especially when it comes to plan assets. “I would expect that under this new administration, there will be a much more active DOL and more activity on fiduciary issues and a stronger fiduciary rule,” he says. “Out of that fiduciary rule may come the opportunity for more litigation.”

Several cases filed in the past couple years, including against Vanderbilt University, Shell Oil Co. and several business units of Fidelity, accused defendants of inappropriately using plan data for commercial purposes. Kasten explains that a new fiduciary rule could reveal who owns plan data, whether that is the plan administrator, vendor or participant. “It’ll generally be heading toward [a decision that] the vendor does not own the data and can’t just use it for marketing purposes,” Kasten suggests.

Investment litigation, specifically targeting fees and losses, is also predicted to rise throughout 2021. John Niedernhofer, a national complex claim leader at Marsh & McLennan Agency, says he expects to see an increase in retirement litigation given the extensive market volatility in the past year. “Whenever there is substantial sustained market volatility, or a sustained bear market of 10% plus, claim frequency goes up substantially for 12-plus months,” he explains.

Investors who bought high and sold in a trough only to see their investments rebound later will second-guess the advice they received, Niedernhofer notes. Furthermore, the mix of volatility, its duration and economic pessimism will drive claims. “Add in more volatility and more duration of volatility and claim propensity increases,” Niedernhofer says. “To that, add in desperation—such as dramatically increased unemployment figures and a pandemic-fueled widespread negative outlook—and litigation activity will increase in every area, and certainly in investment advice.”

Kasten says he expects most investment litigation that will occur within the coming years will primarily be due to investment results after prolonged, multi-quarter or multi-year down markets. He says litigation increased in the years after the dot-com collapse of 2000 and the Great Recession of 2008 because participants were exposed to severe risk without diversification. “If you get into a prolonged decline, where it’s quarter after quarter of losing results, and you see a lot of participants losing a lot more money than you thought, you will see litigation from that,” he warns.

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