401k Plan: How’s The Committee Doing?
While an employer sponsored retirement plan is not required to have a committee, overseeing the plan alone is a significant responsibility. Establishing a committee can do more than just share the workload. It fosters prudent decision-making regarding plan administration, investment selection, and ongoing monitoring—-all of which are critical under the high standards of ERISA. Importantly, a strong committee can reduce the personal burdens and legal liabilities that would otherwise fall solely on the retirement plan sponsor. The key, however, is that the committee must be high-functioning. Read on for practical advice about 401k committees from ERISA experts.
High Functioning Retirement Plan Committees
A well trained and well-run committee can contribute to achieving the“prudent person” standard required by the Employee Retirement Plan Income Security Act (ERISA). Ideally, by combining forces, committee members ensure that all choices are made through deliberate and thoughtful processes, and squarely focused on the benefit to participants. As retirement professionals at Plan Sponsor point out, although ERISA does not mandate a committee: “Prudent practice is to have a three- or five-member committee, potentially including representatives from human resources, finance or treasury, and information technology.”
Though useful, retirement plan committees come with a caveat: members must be clear on their roles, and the work of the committee must be well structured and diligently documented. In other words, retirement plan committees must be high functioning. When they are not, in addition to being unhelpful to the sponsor, the plan, and participants, committees can be a huge liability, as ERISA defense attorney Ary Rosenbaum explains:
Most retirement plan committees are staffed by well-meaning people who already have full-time jobs…. None of whom signed up to become experts in ERISA, investments, or plan governance, but here they are. And that’s fine. ERISA does not require omniscience. It requires prudence. The problem arises when committees don’t know what they don’t know, and no one is willing to say it out loud. Instead, committees default to:
- Trusting whoever sounds most confident.
- Deferring to vendors without understanding incentives
- Mistaking activity for oversight
- Confusing attendance with engagement
In other words, committees behave like committees everywhere behave. I’ve watched committees derail themselves over irrelevant minutiae while ignoring the real risks. I’ve seen how easily structure becomes theater….in ERISA, that kind of dysfunction doesn’t just waste time. It creates liability. Courts don’t ask who spoke the loudest; they ask whether the committee acted prudently and with informed judgment.
The good news, if your retirement plan committee, like most, needs attention, is that it is possible to strengthen committee functioning. In Rosenbaum’s experience, “Plan sponsor committees are not bad. They are just human. And human systems need intentional design, discipline, and humility to work.” A great place to start is by ratcheting up the training the committee regularly participates in (for example, it’s probably time to say goodbye to drowsing in darkened rooms during laborious PowerPoint presentations).
Solid fiduciary training, ensuring every committee member understands what it means to be a fiduciary is imperative. Another best practice is running through compliance checks and balances in real time, reviewing data, and “comparing…plan fees and best practices to those of competitors….” Rosenbaum also recommends moving away from high level overviews and digging further into details and scenarios by incorporating:
- Training tied to actual committee decisions
- Discussion of recent litigation trends in plain English
- Explanation of what bad process looks like
- Guidance on how to push back on advisors and vendors
Use The Plan Document and Take Minutes Seriously
At CAPTRUST, Michael Webb also underscores that serving on a retirement plan committee is a serious responsibility, and requires familiarity with the actual plan document, as well as supporting documents such as service agreements, the committee charter, and investment policy statement: “You really need to act and think about everything as whether you’re maximizing the retirement benefit for participants and beneficiaries….A good committee meeting is a meeting that references plan documents more than plan investments….That’s how important they are.”
Plan Sponsor emphasizes that another best practice for 401k committees is recording detailed minutes, which document not just what decision was made, but also the process used to reach the decision: “Since ERISA rules focus primarily on prudent processes, committees should meet regularly and document their meetings with minutes that show they have made decisions about investments or hiring service providers after discussion and considering different points of view.” Toward the documentation of prudent process, Jodi Epstein of Ivins, Phillips & Barker counsels: “Rather than having an open-ended conversation, you want to have some closure, saying that the committee agreed to make a change or not make a change…Don’t say they’re going to revisit the issue if they’re not going to revisit it. Don’t put stuff in the minutes you can trip over later.”
An Ounce of Prevention: Protection Is Always Best
Retirement plan sponsors and committee members must understand what’s at stake should errors and oversights result in losses to participants:
Making prudent fiduciary decisions for the plan involves staying informed and monitoring recordkeeping, administration and investment fees…Individuals who serve on a retirement plan committee take on the role of plan fiduciary. Were the plan to violate ERISA and face legal action, committee members could be personally liable to restore any losses to the plan or to restore any profits made through improper use of plan assets…
Given the personal risks involved in serving as a fiduciary, it’s best to be protected against lawsuits, and fiduciary liability insurance is the only coverage that does so. Though required, ERISA Bonds protect the plan and participants—not the sponsor or other fiduciaries. To help retirement plan sponsors mitigate their personal risks, Colonial Surety Company offers affordable fiduciary liability insurance and includes basic cyber liability insurance–which explicitly covers the business and plan–at no extra cost. For a few dollars a day, our Fiduciary+ Cyber Liability Insurance package arms plan sponsors with:
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