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Reader Responses April 3, 2004
Survey Says: Employee Retirement Board Representation
March 28, 2002 (PLANSPONSOR.com) - While much of the
public 'debate' regarding the various pension protection bill
proposals has centered around company stock limits or
investment advice access, there is an element in Senator
Kennedy's bill that would appear to have a greater impact on
a MUCH larger number of plans - the requirement that
participants be represented on retirement plan
boards.
Reported by Nevin E. Adams
This week we asked our readers if this was an idea whose time has come – or an idea best left undone?
The question stirred up a vigorous ‘debate’ among readers – and we’ve got the VERBATIMS to prove it. Still, despite the concerns expressed by many employer advocacy groups, roughly 31% of our readers thought employee representation was an idea whose time has come. Now, in fairness, many of those comments came from union and/or government programs that already have such arrangements in place. But a surprisingly large number of readers in the ‘private’ sector already have these type arrangements in place – and the vast majority was quite pleased with the result.
As one reader noted, ‘In government plans, employee representation on governing boards that have responsibility for benefit plans is typical. This may be a union representative, someone elected by the various participant groups, or someone appointed by the governor (mayor, etc). My experience is that this works well and gives employees a certain comfort level that they are given a voice regarding plan decisions.’
‘When ERISA was firstenacted it was said to
include ‘Every Ridiculous
Idea Since Adam,’ but
we now know they left
one out.’
Regarding the difficulties of choosing the representatives, one explained, ‘We went through a process of soliciting interested employees and then the Chair and I interviewed the candidates and made the selection. So far it has worked very well. These members are able to understand the process and directly communicate to the employees the good work the Committee is doing on their behalf. Open communication goes a long way to break down the barriers of miscommunication and mistrust.’
Notwithstanding, the vast majority of this week’s respondents (69%) were opposed to the notion of adding employee representation. While the concerns expressed were varied, they tended to fall into the following categories: (a) how would you find/pick them, (b) they won’t be able – or willing – to assume the responsibility, (c) the costs and inefficiencies of that approach will be borne by the plan, (d) it’s not needed – or some combination of the above.
One reader summed the concerns up nicely. ‘These representatives will come from among the same employees who don’t pay attention now? Or know the difference between a bond and a stock?’
Another expressed a different concern. ‘The most worrisome issue to me is that the representatives may be exposed to confidential information about fellow participants. If a board has to be open with all financial information, details of hardship withdrawals and the like would also be shared or at least available.’
Another found a ‘silver lining’ in the proposal. ‘I think a ‘worker’ representative on an investment board would be pleasantly surprised at how much we actually do to ensure that our 401k investments are appropriate. They probably have NO idea of the amount of monitoring, due diligence, planning and communications that is required to maintain a well-diversified array of investments. I’d love to have ‘Joe or Mary Six Pack’ see how much time and effort go into the plans.’
Another said, ‘Employees don’t have a clue of the regulatory and administrative hurdles we face to deliver benefits. A good plan sponsor recognizes the employees as customers and should be working to serve them. You don’t need representation to do that.’
Still, there were many open minds from employers that hadn’t taken the step yet, including ‘I have found that involving employees and sharing generally results in very good results. And you just might be very surprised as to how financially educated some employees are that may not be in Company financial positions.’
Another said, ‘A company like mine, associated with the manufacturing industry, should have an employee representative from both the entry level office staff as well as the shop floor. Even though pay is similar from entry level up to lead people in the shop and office, both have this perception that the other has it made. Both deserve a voice unencumbered by a six-figure salary mindset.’
As for willingness – one plan sponsor noted, ‘I have a hard time believing that a normal employee would be willing to expose themselves to personal liability of being a Trustee or on the Advisory Committee as a fiduciary, even with the company providing insurance coverage and indemnification. I wouldn’t want to do it if I were an employee, and sometimes don’t like doing it as a part of management!’
And then, of course, there was this week’s
EDITOR’S CHOICE
–
‘When ERISA was first enacted it was said to include
‘Every Ridiculous Idea Since Adam,’ but we now know they
left one out.’
This week we asked our readers if this was an idea whose time has come - or an idea best left undone?
THE VERBATIMS
Very few employees have the background to understand how pensions work. They should not have a say in how pensions are run. It is hard enough having company owners as part of the plan trustees and getting them to understand what we have to do to comply with laws.
I can't even imagine the nightmare it would create if employees were added.
Like so many things, I think this is an idea that sounds great in theory, but would be miserable in practice (that's a "no" vote!). Finding qualified employees who don't have their own "agenda" would be extremely difficult, but the worst part is the possible politics involved in the process of employees getting on the committee. This is an idea that belongs with collectively bargained companies only - it would be way too disruptive, and worst of all, would not serve it's original purpose.
Employee representation is an idea whose time has come
Pension Benefits are part of the Employee Compensation Package and Employees should have input and representation in how the Fund is administered.
This approach is consistent with the philosophy "If it feels good, do it." Who would you rather have taking part in decisions; an expert in investments whose full-time job is monitoring and analyzing risk and returns or someone who was elected or appointed to the position because of political connections, however well-meaning they may be?
Our Investment Plan Committee already has some employee representation through 2 non-voting members. Most of their input relates to plan education and operation issues where they have direct exposure to the wants and needs of our participants and relay this information to the Committee.
Where they don't have expertise is in analyzing fund performance and selecting alternative investments. I just don't see where you would find a qualified employee with enough knowledge to evaluate the data and understand what is an appropriate or inappropriate investment option for the Plan.
Can't see how placing participants on the pension committee or board will add value. Basically, committee is worthless. I don't believe members are out for the plan or its participants but themselves. They are pro or con on issues based on their own benefit from it or perception of a benefit from it. Added people will add to the problem.
What Ted needs to do is eliminate all the ridiculous tax rules designed to protect us. Those create more costs for the plan to operate and add no "real" value. Code was created to protect the lesser paid. "Poppycock" There are enough non-qualified plans, stock options etc that payoff the higher-paids. The concept behind protection and a qualified plan is ridiculous. More smoke and Mirrors
It's all about education. The reality is the responsibility lies with the participant. Companies need to do their best to educate employees. They spend too much time trying to get employees to join the plan. It's a typical marketing sales pitch. Do they actually promote "you can lose money if you join this plan" No way! Who would join or increase contributions. Plans need to do a better job getting employees to understand the risk and quit promoting returns and retirement nest egg. We must refocus and change our approach. People must better understand the short term ups and downs the market.
I think that 'regular' employee representation would be a farce. Retirement plan committees need to survey the participants annually and work to implement the ideas those surveys produce. Too often these plans are viewed as a tool for the company; to attract and retain talent or to align employee's interests with shareholders by matching in employer stock. These plans are an employee benefit not an employer benefit.
I think this is another case of DC going off half-cocked - they come up with some righteous sounding idea but no real idea of how to effectively implement it or what the repercussions of this will be. How do you determine who a good representative of employees would be? How many do you have? Is it just 1 or is it proportional to the size of the company? If it's proportional, is there a limit to the number of employees? Could you imagine how many employees a company like GE or IBM would have to have to adequately represent the breadth and depth of employees?
What training would these "rank and file" employees need to have to understand what's going on? How on EARTH would these people be appointed or elected? Would it be a popularity contest? Would they be compensated for their participation? Like I said, it sounds like a neat idea, but…
In our industry (manufacturing), it's an idea left best undone. The average employee in our industry doesn't understand enough about how plans operate, and how governmental agencies regulate and monitor those plans, to have any significant input on a plan's operation. This idea is a disaster in the making!
Speaking for the thousands of small plans for privately held companies, investment elections are what the plan can afford to provide. Altruistically, those choices are made for the overall population based on the theory of diversification and historic return. An employee rep, even assuming they have the knowledge base, would have very little contribution in this (and may actually be self serving, adding what only they want for themselves to the investment elections).
When ERISA was first enacted it was said to include "Every Ridiculous Idea Since Adam," but we now know they left one out (It figures that Teddy Kennedy would be the one pushing it). Also, UK plan sponsors have had to contend with "member-nominated trustees" since 1995. It instructive that the Myners report that was issued in March 2001 (it was commissioned by the UK government) make the point that most UK trustee bodies do not have sufficient expertise to discharge their responsibilities, particularly their investments duties. Is there a connection here? My own experience is that "member nominated trustees don't hurt you, but they really don't add much either.
"Regular" employee participation in the trust issues is a very bad idea. They do not have the management training or background to make many of the decisions. Also, many private issues may be covered in the meetings that should be kept confidential - I don't see that happening. Also, when it comes to investment funds, everyone has their "personal favorites" and I think it would become an "everyone for himself" mentality of decision-making.
I would vote for employee representation. There are a number of ways they could be chosen. It should be seen as fair.
1. Volunteer
2. Employee Vote
3. Interview and selection by financial employees
4. One bargaining unit and one nonbargaining unit employee (for companies with unions.)
I have found that involving employees and sharing generally results in very good results. And you just might be very surprised as to how financially educated some employees are that may not be in Company financial positions.
Adequate protection of employees' financial future via representation on the Retirement Board has been the law in Florida for Police and Fire Pension Plans since 1986. Who can better represent the interest of the Police Officers and Fire Fighter members, than the Police Officers and Fire Fighters members themselves? 40% of Trustee Board Members are employees, 40% appointed by the Plan Sponsor and 20% selected by the employee and plan sponsor trustees. Our system has been working for over 14 years. Congress should not waste time trying to reinvent the wheel, just roll along with one that has proven to work.
On one hand, I think a "worker" representative on an investment board would be pleasantly surprised at how much we actually do to ensure that our 401k investments are appropriate. They probably have NO idea of the amount of monitoring, due diligence, planning and communications that is required to maintain a well-diversified array of investments. I'd love to have "Joe or Mary Six Pack" see how much time and effort go into the plans.
On the other hand, the "worker" representative could have a hidden agenda. But then again, there's always someone with a hidden agenda.
It appears to me that we currently have laws and internal controls and duties in place and yet they are not enforced or followed. By adding a participant as a representative it would bring a sort of "checks and balances" aspect but this is primarily a sophists argument. The people currently responsible with fiduciary duties should be held accountable and that type of culture should be fostered by setting consistent examples punishment for those who breach their duties. The participant representative may not be knowledgeable. They may breach their duty just as easily as the others. It sounds good but whether it would have a direct material impact in forcing others to do their duty is questionable.
If "regular" employees are represented on the boards that determine 401(k) 's the boards won't have the same information available. They won't talk about the same things they do today. This won't help to prevent another Enron, because the greedy won't let the rank and file in on their plans.
In government plans, employee representation on governing boards that have responsibility for benefit plans is typical. This may be a union representative, someone elected by the various participant groups, or someone appointed by the governor (mayor, etc). My experience is that this works well and gives employees a certain comfort level that they are given a voice regarding plan decisions.
These representatives will come from among the same employees who don't pay attention now? Or know the difference between a bond and a stock? Somehow I see this as babysitting a whole new crop of people who have a taste for POWER but don't know anything about the business.
I think there must be a better way than make such a requirement. Nor do I think it will resolve the issue.
Unfortunately, in extremely simplistic terms I liken the accounting mess that is typified by Enron and Global Crossing to a fire. Should one conduct fire drills even if one's own employer says the building will never burn? ABSOLUTELY. By the same token one must be master of one's own fate by paying attention to one's own financial circumstances.
Is this another manifestation of the baby boomer effect? I will spend everything I have (not save and create lots of debt) and then expect someone else to take care of the problem. Wait! There's a problem with the someone else. Let's put some controls in place so I can go back to not paying attention again!
Other than that. I don't have an opinion.
In a company whose main plan covers 70,000 active employees, who pays for such an election
I could see some corporate management, whom I have been associated with in the past, strongly opposed to such a recommendation. Who would choose the "employee representatives"? If it were by vote of the employees, this could look a lot like a union...and many employers who have resisted unions in their companies would resist this "back door" approach to start to bring such representation into their companies.
Most employers have, at least as a secondary goal, the social good of providing an opportunity for employees to save for long term needs such as their retirement. Part of my objectives this year, as in prior years, has been to increase, or maintain, the participation rates in the plan (without automatic enrollment, by the way). Seems to me employees always have the option, if they don't like the features of the plan, to opt out. We canvass our employees regularly as to what they like or do not like about their benefits (including 401(k)). Their representation comes from people like me and my boss, who would lose pay if we don't provide what the employees want in the plan's provisions and, thus, will be strongly encouraged to seek amendment from senior management to provide those features.
Employee representation would just be another "feel good" solution that will cost money and time and have no positive influence, with the exception of a few anecdotal situations which the politicians will seize upon to show how well its working...but then isn't that what we have come to expect from Washington?
I would like to seem more employee representations on retirement plan boards. They should have a voice in the decision and policy/procedure making of their plan. It could also help management realize how the employees perceive the plan and the way it is being managed.
This is just my opinion but I feel it's an idea best left undone. Don't get me going.
This is what we sent to all members of Kennedy's HELP committee and one of Miller's co-sponsors:
'Regarding the joint trusteeship of the plan, this is just not practical for a company that has employees in all 50 states. Besides the logistics and expense of elections and meetings, it is not good policy to have individuals with limited or no investment and qualified plan experience making decisions for a plan. Also, this provision is not needed since the decision-makers of the plan MUST act solely in the best interests of plan participants."
There are numerous ways this provision is bad (actually the whole bill is so bad it will hopefully crash). The election process- do people get elected because they have the most friends, hate the company the most or have made the most money in their 401(k).
Cost of election and meetings- probably would be charged to many plans, which would reduce the account balance of participants
Resolving disputes - The DOL expects the meetings to be adversarial and so will designate someone who has no knowledge of your plan to make the final decision.
Fiduciary responsibility - at the same time as they want unqualified people making decisions, they would want them to be personally responsible. Would a rational person want to do that?
Its time has come. In fact it's time came when the first pension plan was developed. There are always talented people in the rank and file with sophistication in fields other than their paying profession. Their co-workers will be much more open and honest with them than they typically will be with anyone in management simply because of the common ground they share. A company like mine, associated with the manufacturing industry should have an employee representative from both the entry-level office staff as well as the shop floor. Even though pay is similar from entry level up to lead people in the shop and office, both have this perception that the other has it made. Both deserve a voice unencumbered by a six-figure salary mindset.
Company stock is a reactionary measure championed by blow-hards out of good ideas. Advice & education is an obvious need that will happen naturally if congress ever figures out the common citizen isn't a child needing protection from their own decisions. Legislate measures to protect neophytes from crooks and sit back prepared to be in awe of what a free society will build. Why can't a plan offer both guaranteed returns for those who don't want to or cannot learn about investments as well as an open market for those who can with out taxpayer funded safety nets? You make a mistake you work longer, you don't you have additional choices. Just like life.
We already have employee representation on our 401(k) committee. In addition to the CFO, HR and Investment personnel, there is an employee representative appointed by our President from each business unit (we have 4 or 5 distinct business operating units).
Our Retirement Committee (defined benefit plan) we have both outside members and some employee representative but the employees on this committee are from the upper management level.
As a Fund Administrator for a Union pension & welfare fund, the idea of worker representation, as you are aware, is not foreign to us. The Union or Employee Trustees on the Board are the elected officials of the union. They have extensive experience in negotiations, communications and representation of the workers themselves. They truly represent the union workers exceptionally well. If employee representatives are put on pension boards for other types of pension plans, were will they come from, and how will they be selected and removed? In a Union Pension fund, if the participants are unhappy with the management of the fund, they have recourse with the elected officials of the union.
I think that participant representation already exists, as you say, by having plan sponsors present on the various advisor committees. If the HR person is gathering feedback from the "regular" participants, actually sharing it with the board and then communicating responses and/or results, then the "regular" participants should feel fairly represented. I have major concerns with opening such an advisory board to the "regular" participants. For fair representation, the board would have to open the meetings to more than one extra representative. The group would need to be educated, as needed.
The most worrisome issue to me is that the representatives may be exposed to confidential information about fellow participants. If a board has to be open with all financial information, details of hardship withdrawals and the like would also be shared or at least available. I don't think that such information has a chance of remaining confidential if it fell on several sets of additional ears.
It is not necessary for employees to be represented on the various committees for 401(k) or pension plans. In a most manufacturing environments (most offices, in fact) the participants have no concept of the laws, procedures, investment policy, etc. that it takes to run or administer these types of plans (nor do I know how to operate their machines). It smacks too much of a union policy. I believe the UK has similar requirements for their pension boards.
Leave "undone."
Many participants/employees do not have an understanding of benefit plans, how they work nor the regulations governing them. Their contributions would be limited. The interview with Dr. Benardzi highlights part of the problem.
While I am a conservative Republican, I do think this is a good idea. I am sure it will cause MUCH concern by many Retirement Plan Boards. Companies will think twice before they start to dip into the pension funds to cover cash shortages.
Yes, employee representation is a great idea. Especially when your plan is a cash cow for your company and/or your plan has company funds/stocks in it.
How would representatives be picked and how would they be ensured that there would not be job repercussions for them if they don't automatically agree with employer/management? You'd almost have to have some sort of union.
We are being told our retirement is our responsibility but our options and control are very limited. Employee representation or general voting rights on plan choices would put some real control back into the hands of the people who ultimately pay for the choices.
We have had employee representatives on our 401k board since the 1980's. Currently we have one officer/shareholder and 4 employees who do not have any share in ownership. It works fine. 500 participant plan, $40 million in assets.
I think employee representation is a good idea. Whenever we are dealing with an investment board, we recommend representation from all levels of the company. This helps from an employee communication and employer liability standpoint. The only time I see the employer not wanting to do this is in very small companies.
I don't think this is something that should be mandated. Employee representation should be optional at the Plan Administrator/Employer level.
I have a hard time believing that a normal employee would be willing to expose themselves to personal liability of being a Trustee or on the Advisory Committee as a fiduciary, even with the company providing insurance coverage and indemnification. I wouldn't want to do it if I were an employee, and sometimes don't like doing it as a part of management!
We have never removed anyone except when they leave the company. Replacements are added by people indicating interest in serving to the committee and then the current committee chooses new members. Of course the president is on the committee and his opinion is given a lot of weight, but the committee votes on new funds and plan administrators and takes an active roll.
We are very much a company given to consensus management and this gives management a real insight into how the rank and file feel about the plan and what their needs are because employees will speak to members of the committee where they would not to top management.
The nine member committee that administers our 401(k) Profit-sharing Plan has been a mix of owner shareholders and other employees, I believe this goes back to its initial appointments in the 1970's. I joined the committee in 1986 and my assessment is that while dealing with plan matters both the owners and employees focus on their fiduciary obligations and not their company status.
Each of course has developed different skill sets through
their service, but all of them add to our ability to
communicate with participants. Often the best ways to help
educate and explain the plan and its investments is to have
committee members out in the business where participants can
stop them and ask questions or make suggestions. This works
for us in a company with operations in only one geographic
region and may be hard to duplicate in multi location
entities, but it's a definite plus for our plan.
I believe that including employee representation on retirement boards for the normal corporate plan (not talking about union/trustee type arrangements) is an extremely bad idea, for both defined benefit and defined contribution plans.
It goes to the heart of the difference between fiduciary
functions and settlor functions. These plans have a huge
impact on their business sponsors. Including people who have
no understanding of the 'business' issues involved, or of
pension law, would simply slow down decisions and lead to
less informed management of the plans. And, frankly, this is
still a voluntary system, and the participant is the
beneficiary of the plan--not the sponsor.
How much will it help? How much will it hurt? Not certain much of either. Having rank and file represented during board discussions might serve to remind the rest of the board about employees' interests.
I have no problem with employee representation; I generally use employee focus groups when making major changes to our plans. After all, if they don't understand the plan, there really is no benefit.
Under many state and local statutes and under federal law employees have specific rights to representation. Under the constitution of the United States citizens have the right to free speech, assembly, and more which implies concerted action is a right as well.
Given that employees have the right to representation, that employers have been stealing them blind in pension scams and placing them at risk of losing needed health benefits as employees or retirees, and given that wages of workers have paled in comparison to the outrageous compensation packages of corporate bosses everywhere, OF COURSE THE TIME HAS COME FOR EMPLOYEE REPRESENTATION.
Employee representation sounds good at first blush, but I am not sure it is practical for every group of participants. Its an awful lot of responsibility to put on an employee that probably doesn't understand the impact of the choices they will be asked to make. Perhaps something like this would be more workable if it were not mandatory. Let the participants decide if they want a representative from one of their own or not.
As a participant, I would rather leave it to the experts. I have enough trouble making allocation decisions in the choices I am offered. I would find it difficult to find one of my peers to entrust with the decision of what we should be able to choose.
Sounds like big Labor sees this as a way to set the groundwork for the unionization of every business in America.
Of course they should be represented. They are no smarter nor "uninformed" than plan sponsors. After all, it is their money and their retirement.
No, the time has not come to invite Pat Q. Public to the Investment Committee. The concepts of allocations, investment alternatives, fiduciary responsibility, etc. etc. are not to be taken lightly, and are not learned so easily. Our top management team is the current committee; even with their experience and educational bases, the discussions are difficult and great caution is taken. I vote we leave it the way it is.....
We have 14 voting members of the "Pension Committee" at our organization. I'm (the CFO) a voting member and the only management/sponsor on the Committee. There are 11 members who are owners/employees and 2 are "regular" employees. The "regular" employees were added at the beginning of last year (2001). I, along with the Chairman, strongly advocated adding the "regular" employee members. We went through a process of soliciting interested employees and then the Chair and I interviewed the candidates and made the selection.
So far it has worked very well. These members are able to understand the process and directly communicate to the employees the good work the Committee is doing on their behalf. Open communication goes along way to break down the barriers of miscommunication and mistrust. I would strongly recommend any large/diverse plan sponsor(s) open the Committee to "regular" employees.
As a side, I've seen it work well in previous
organizations where I've worked. All our Plans are DC type
plans, profit sharing, pension and 401k. We had ~$348 million
in assets at 12/31/01, have three sponsoring employers under
our plan with ~3,000 total participants.
I believe left undone. - This appears to create another layer of administration to add to the already complicated retirement plans - too many questions on how this would work. I believe the answer is in educating employees on the value of saving in a 401(k) and how to invest and diversify is more important.
In keeping with the decisions made by five different boards, on which there was employee representation that included the power of veto over investments. Almost without exception, the employee representatives concentrated on individual pension benefit issues, such as service and disability eligibility, while the public and government employer representatives concentrated on investments.
From employee representation on private plans, I see very
little to be gained in terms of investment practices, some
improvement in employee communications and certainly more
administrative expense. ERISA creates an automatic conflict
of interest for the employer administrators in determining
investment practice: plan fiduciary vs. employer interest.
The answer should be the appointment of a totally independent
administrative trustee.
I work with a variety of retirement plans (from 2 participants to 500 participants) and have generally found most participants to be uninterested in making investment decisions. The minority of participants who are interested tend to think of themselves as "successful & experienced" investors. In reality, they often times do not realize their shortcomings and make poor decisions. I fear that these type of employees will seek out such a role on a committee and in the end cause more harm than good.
Having said that, I think a smart employer already seeks
input from the "population base" of their employees regarding
general plan investment decisions so they are not criticized
for not being objective. To regulate this process will only
alienate the two groups.
I think it's a good idea, unfortunately I question how beneficial it would be for many plans. I was on a seven member Investment Policy Committee and there were two employee reps. They had very limited knowledge about investing or investments and rather than look dumb, they voted along with the senior management members. The employee reps rarely asked questions or had any input, which was unfortunate because we really wanted it.
The idea of employee representation on these pension boards sounds noble enough but the actual selection of those representatives could be incredible difficult. An individual plan will have tens of thousands of participants. How many reps would there be? Only a handful at most I would imagine. I could only imagine an election process to adequately name those reps, but at the same time try to imagine how many workers would put their names on the ballot.
If the employer named them that would be interpreted as putting "company" people on the boards which would be perceived in a negative light by the employees. I think that the end result either way would be a much weaker representation than provided through a union. The employee reps need the backing of their peers to be effective board members. They would also be at a great disadvantage to the company reps when it comes to all the issues that a pension fund encounters, issues that the company reps are familiar dealing with. Perhaps the workers could hire a professional to represent them, but where would the money come from to pay the professional? And how much trust would they have in this professional?
If worker reps on these pension boards become required, there will be growing pains on both sides of the table. If both sides can't work well together then the plan will suffer because of it.
An idea that's best left undone.