What Retirement Plan Committees Should Know and Discuss

The retirement plan committee of an organization needs ongoing support to stay abreast of industry regulations and trends.

About 62% of plan sponsors understand their fiduciary responsibility, says Jordan Burgess, senior vice president, Specialty Field Sales at Fidelity Financial Advisor Solutions. “They understand the basics of participant education and communication,” he tells PLANSPONSOR, “which should be a regular part of what they talk about.”

Typically, says Bill McClain, senior defined contribution (DC) consultant with Mercer, plan committee members need updates about judicial, regulatory and legislative issues as well as retirement trends. “There’s so much happening in the DC world, it’s difficult for a committee member to keep up with everything going on without support,” he tells PLANSPONSOR.

The regulations that impact DC plans are an important subject to bring before committee members, McClain says. “You need to be able to understand how complex and nuanced regulations apply to the particular situation,” he warns, “and how they have practical grounding,” he says. “How does a regulation apply to the committee members? It requires a high-level skill set—they almost need a legal understanding of how DC plans work in real life.” For help, plan committees often turn to the plan’s adviser, who should be able to answer questions in clear, simple language.

Life stories are the best way to educate plan sponsors or anyone, for that matter, says Jania Stout, practice leader and co-founder of Fiduciary Plan Advisors at HighTower. “Bring to the committee meeting actual cases and walk them through what happened to cause the lawsuit,” she advises.

Stout recommends the committee give their feedback about what the company in each case should have done, with an eye toward the better outcome they would have gotten had they followed more prudent procedures.

The investments in a plan are another key topic. Burgess suggests that committee members review the investment options on a quarterly basis, at a minimum, and assess how they are performing in line with the investment policy statement (IPS). “Make sure the committee members are well informed about the IPS,” Burgess says. “Although these two may be drier topics, they are well worth it” for the fiduciary weight they carry.

Fee allocation is an important area of committee focus. “There’s been a lot of attention on fee negotiation and benchmarking,” McClain says. “Recordkeeping has become very competitive. Sometimes committees forget about the other side: how you allocate those fees back to participants, which is also a fiduciary decision,” he says. “We’ve been educating committees now as the industry moves away from revenue sharing, they have to address the issue straight on.”

In discussions over fees, committee members will need to examine whether to use a per-account flat fee, fees based on assets, and whether to use an ERISA spending account, which brings up a host of other issues, such as how fees are paid equitably by participants. “Fees take up a lot of meeting time these days,” McClain admits.

Compliance audits can be a key topic, yet McClain says when the topic comes up, committee members often counter that they already have an annual audit.

But they are referring to the plan’s financial audit, not the audit that assesses the plan’s administration and compliance levels. “While it’s true the recordkeeper is charged with administering the plan,” McClain says, “if there is an error in the plan administration or a compliance issue, it comes back to the plan sponsor.” The recordkeeper may have to fulfill some contractual provisions, but if the Department of Labor (DOL) or Internal Revenue Service (IRS) finds issues, they will fine the plan sponsor—not the recordkeeper.

Plan committee members should be acquainted with the potential level of risk: sanctions from audits and the financial risk from corrections can run into the millions of dollars, according to McClain.

Plan committee members’ backgrounds run the gamut, from finance to HR to legal to those from the corporate side, McClain says. “A well-structured committee should be diverse and provide opportunities for sharing different perspectives.”

The diverse backgrounds means that these disciplines all lend their expertise to the committee, McClain says, and can direct the flow of information—sometimes sub-optimally. “Sometimes you see situations where everybody waits for one person to conduct the committee, and everyone follows that person,” he says.

But ideally committee members will treat one another as sources of important information: A finance person, for instance, who is not as up to speed on the Employee Retirement Income Security Act (ERISA) can hear the opinions and insights of someone in HR. 

McClain notes that when it comes time to select a managed account provider—in many cases, the choice is dependent on the recordkeeper of the plan—the finance person might choose the provider with the lowest cost. The HR person may understand that choosing this provider carries a lot of fiduciary responsibility, because it affects the investment options for participants. The HR person might be more attuned to the sales techniques of the provider.

Different committee members can find topics that play to their professional strengths. “The legal person is going to love the fiduciary audit file and documenting the processes in the plan,” says Steve Bogner, managing director at HighTower Treasury Partners. “The CFO will key in on the economics and performance, but might also be extremely interested in having the strongest possible education program for the participants.”

The ideal committee environment creates an opportunity for people to share and help other committee learn from their peers. “For fiduciary decisions, you want a free exchange of ideas and consensus,” McClain says.

As 401(k)s are increasingly the primary retirement vehicle, McClain points out the greater need for scrutiny, education and diligence by governing committees. “It’s an area more and more people are aware of,” he observes, “as well as their own fiduciary responsibility and risk.”