Understanding Investments and Fees: A Key Part of Plan Committee Education

As retirement plan litigation has become more commonplace, plan committee members need to be prepared to defend themselves in case they are ever in a court situation.

Many retirement plan lawsuits involve questions regarding plan investment and other fees, as well as the reasonableness of those fees. Therefore, educating plan committee members about investments and the importance of benchmarking investments and costs is a crucial part of fiduciary training, experts say.

Keeping Track of Fees

Veronica Bray, a 401(k) and 403(b) service provider search consultant who owns Retirement Plan Advisor Search in High Point, North Carolina, and serves as an expert witness to retirement plan-related lawsuits, explains that attorneys suing retirement plans have the right to depose anyone who sits on the committee.

“It really is important for all committee members to know all the fees on file because if they’re deposed, they really need to understand where the fees are, what they are and who’s getting paid what and if they’re reasonable,” Bray says.

Bray adds that a best practice for plan sponsors is to have an outside consultant or investment adviser who educates the committee on a quarterly basis. She says even just taking 15 to 20 minutes to talk to committee members about fees and other hot topics, like litigation or legislative updates, is helpful when reviewing the plan.

She also emphasizes the value of taking accurate and thorough minutes at every training session.

“What I’ve seen in the minutes, through discovery at some of these cases, is that [a committee] may have met every quarter and someone kept minutes, but the minutes weren’t that good,” Bray says. “…The minutes need to be detailed, especially when you’re talking about fees, benchmarking, taking the plan out to bid or just doing a review of fees. Everything needs to be documented and detailed.”

One Consultant’s Approach

Greg Johnson, senior consultant and director of ERISA technical services at the Multnomah Group, Inc.—a consulting firm based in Portland, Oregon—says his firm meets with their clients’ committees once a quarter to go over their plans’ investments, which he says is the “cornerstone” of what the firm does.

Multnomah Group also conducts an annual fiduciary training program that consists of teaching committee members about their fiduciary responsibility, ensuring their understanding of foundational documents like the Investment Policy Statement and charter, as well as education on service providers and their fees, employee engagement and required disclosures, plan operations and more. Johnson says about 70% of the firm’s clients are non-profit and governmental plans.

Whenever there is a new committee member, Johnson says the consultant meets with them personally and discusses their fiduciary responsibilities.

Johnson says one of the impacts of litigation becoming more frequent in the retirement space is that it has become more expensive to get fiduciary liability insurance. In recent years, some insurers have sent out questionnaires that ask committees to explain the last time they participated in fiduciary education, he explains. 

“That to me was sort of a game changer because a lot of times committees are like, ‘okay, it’s time for 10 minutes of fiduciary education,’ and you see everyone tune out or mentally shut down and quit listening,” Johnson says.

Johnson says he leverages the issue of fiduciary liability insurance to emphasize the importance of fiduciary education and documentation.

Outside of the firm’s fiduciary education program, Multnomah Group conducts annual fee benchmarking.

“Anytime we do the fee benchmarking, there’s an education component to it because we do have to take a step back and explain how fees are collected,” Johnson says. “I’ve definitely seen in the last three years a lot of changes in how fees are collected, and certainly recordkeeping fees in particular have gone down, so it’s sort of a constant topic for committees.”

Even though Multnomah Group advises a lot of governmental plans that are not covered by the Employee Retirement Income Security Act,  Johnson says the firm still uses ERISA as a guideline for best practices, especially for fiduciary responsibilities. He says fiduciary training does not differ much when it comes to different types of plans, but he says the biggest difference with higher education plans, in particular, is the decision-making process.

“Nonprofits … tend to pay attention to their participants and let their participants weigh in on decisions a little more than what you would see at a for-profit company,” Johnson says. “At a for-profit company, if they change investment providers… they don’t really ask employees; they just do it. The whole way that decisions are made is a little slower in higher-ed.” 

Who Should Sit on the Committee?

Johnson says that the makeup of a committee looks different for every organization. For example, some higher education plans include faculty and staff members on the committee to represent the employees the plan ultimately serves.

Bray adds that it is important for committees to have an odd number of members for voting purposes. In addition, she says it is critical to have people on the committee who represent different parts of the organization—such as leaders in HR, benefits, finance, IT and more—but that including non-management employees on the committee is also in the plan’s best interest.

“I think it’s important to bring in … people that are talking to the employees all the time because that’s where you can hear what’s really going on,” Bray says. “A lot of times employees aren’t gong to tell their manager what they like or don’t like about the retirement program. Someone who is a peer to the employees can get a good idea of the benefits that employees want and [will have ideas of] how to help retain their employees.”