Those individuals responsible for the management and oversight of an employer-sponsored plan have personal liability according to the Employee Retirement Income Securities Act of 1974 (ERISA), because they make decisions on behalf of plan participants and their beneficiaries.
Helping your clients set up a committee to clearly define and document a process of plan oversight is an effective way to help them limit the liability associated with managing a 401(k) plan, and provide tremendous value.
Plan Oversight by Plan Size
Many companies and benefit plans are small enough that creating a formal committee for plan oversight is not a viable option. As companies grow and plan assets increase, formalizing the committee structure makes more sense.
Depending on plan size, you might even consider helping your clients form one committee to oversee the administration of the plan, and another to oversee the investment responsibilities required. Some companies will often form a third committee for decisions that are considered “settlor functions” (company and/or business related decisions which are not subject to a fiduciary standard of care).
The following information provides a framework for helping your clients set up a formal governance process. When available, I’ve included links to sample documents mentioned.
Best Practices for 401k Committees
Forming an investment committee is optional and each committee set-up should be structured around the company’s capabilities and needs.
That being said, here are some basic suggestions for setting up and running an effective committee.
- Committee Demographics: When setting up an investment committee, members are most often senior management personnel from the areas of human resources, finance, and operations.
- Committee Requirements: There is no specific job title or experience requirement for an effective committee member. However, it is essential that members are willing to fully understand the roles and responsibilities of the position, and commit to working together in the best interest of the plan participants and their beneficiaries.
- Committee Understanding: Each member should be educated on the basics of ERISA including fiduciary duties, plan procedures, investment review guidelines, and plan documents.
- Size of Committee: Five to seven members are optimal. It becomes difficult to get anything accomplished with too many members and with too few, there is not enough perspective. Having an odd number helps prevent voting ties.
- Frequency of Meetings: Committees generally meet quarterly, unless the situation warrants more frequent or less frequent meetings.
- Committee Structure: It’s a best practice to appoint a Chairman to run the meeting and a Secretary responsible for keeping minutes and serving as the official custodian of the plan documents and committee records.
- Formalization: Formalizing the committee is important to outline the responsibilities of all members and investment fiduciaries and is typically done through the use of a document such as a committee charter or committee by-laws.
- Fiduciary Acknowledgement: All committee members should acknowledge their appointment to the committee and fiduciary status in writing, if they have voting rights on the committee.
- Documentation Practices: Meeting minutes should be documented including any decisions voted on and documentation should include what items were evaluated and reviewed when making decisions.
- Consistency: An agenda should be followed for each meeting to provide consistent process for reviewing key items.
Regardless of whether a company sets up a formal committee or not, a basic set of guidelines can help plan fiduciaries understand their roles and help ensure participants’ interests are put first in all plan decisions.
Fiduciary Formalization Flow Chart
The following flow chart follows a process that can help plan fiduciaries understand, formalize, and manage their responsibilities with documentation that demonstrates the decision-making process.
This chart can be summed up in three steps:
- Identify all fiduciaries and have them acknowledge this position in writing.
- Create a formal process for helping fiduciaries understand and document their responsibilities.
- Ensure committee members engage in a proactive, organized process that is documented.
If you can help your 401k clients with the steps outlined above, they’ll be better prepared to demonstrate the prudent management and oversight of their plan.
The documents listed in the flow chart (indicated in black words in parentheses) are all available through FSS, a division of fi360, Inc., in the 401k Service Solution Document Kits. The graphics in this blog post were taken from the Committee Formalization Packet found in the Quarterly Plan Compliance Kit that is sold through fi360.com, which is a complete packet you can give your 401k clients that explains and provides documentation to help them formalize and document their plan oversight process.
Update: May 15, 2016 – I’ve received numerous requests for a 401k Committee Builder Program to help Plan Sponsors formalize their plan oversight, document compliance, train committee members, and run effective meetings that move the needle for participants. If you want to participate in the development of this program and help make it OUTSTANDING, email me at [info at pivirottoresourcegroup.com] with the subject of “401k Committee Builder Program” and tell me what are the biggest challenges you face with your committee set up and management and what 3 things you feel this program must include. I’ll get back to you before the first week of June to confirm your participation as I plan to develop it during June and launch it in July.
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