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What is plan governance?

What is plan governance?

By W. Andrew Larson, CPC

It is our view that the goal of retirement plan governance is two-fold. First, plan governance should ensure that a business’s retirement plan is operated in compliance with Federal laws and regulations.  Second, plan governance should position participants to maximize their chances for successful retirement outcomes. That’s what plan governance should do.  But what is plan governance? Plan governance is a consistent, flexible, ongoing process that is well documented and transparent. This blog will explore, at a high level, what a plan governance process looks like; the make-up and role of the plan governance team; how to deal with service providers; and what it means to be a good consumer of fiduciary services.

No one aspect of plan governance is inordinately difficult; what is difficult is the ability to remain focused, and consistently execute and document the governance process. Typically, plan committee members have day jobs and their plan duties are usually far down on their to-do lists. Given this reality, committee members must diligently help each other create and follow accountability strategies, plus leverage service providers for assistance when needed.

What does a plan governance process look like?

A good governance process includes the following key elements.

Charter

The charter is the blueprint for what is done when and by whom with respect to the retirement plan. Many plans don’t have governance charters. Creating one is essential for establishing a good governance process. The charter addresses details such as who is on the plan committee, the frequency of committee meetings, roles, assignments and expectations, lines of authority and decision-making responsibilities.

The first step in creating the charter is a careful review of the governing plan document to ensure the charter is consistent with the plan in terms of provisions, terminology, lines of authority and reporting. Frequently, any governance provisions that may appear in plan documents are sparse; hence the need for a more robust document in the form of a charter. That said, the charter must be consistent with the plan document or the committee risks not following the terms of the plan, which would be a violation of legal requirements under the Employee Retirement Income Security Act of 1974 (ERISA).

Master Calendar

A master calendar is the plan committee’s essential “must-do” list. It is an important tool to make sure the committee is timely addressing its responsibilities. Standing annual calendar items can include the following items:

    • Review the plan document for needed amendments;
    • Review and assess service providers;
    • Benchmark and evaluate assets;
    • Schedule educational sessions for committee members;
    • Assess the adequacy of the plan’s fidelity bond; and
    • Evaluate committee members based on skill sets needed.

Documentation Protocol

Having detailed documentation of plan committee activity and decisions is a vital part of any liability containment strategy. Plan notes should be thorough and identify the rationale for key decisions made.

Payroll Log

This is a record of all payroll withholding and remission dates and amounts. One of the top concerns of the Department of Labor and IRS in plan operations relates to the timely deposit of employee salary deferrals.

Who’s on the plan governance team?

The make-up of the plan governance committee is one of the least discussed aspects in the realm of plan governance. And it often seems that committee membership comes with lifelong tenure. As we work with committees, we frequently inquire why “so and so” is on the committee. The typical response is something to the effect of “Well, they’ve always been on the committee.” We urge committees to conduct a periodic reset exercise where they identify the skill sets needed for a successful committee. Once the skills are identified, we then ask them to identify specific individuals—including those who may not be current committee members—who fit the skill set profile. This creates discussion of who could or should be on the committee.

It has been our experience that we often find the wrong people on plan governance committees. In many cases, there are people within the organization who want to be on the committee—and should be—but are not considered for membership. Let me share a personal experience illustrating this. I was on the plan governance committee of a former employer. Most decisions we made were second guessed and challenged by one particular noncommittee member employee. This guy read every bit of plan information that was provided. Not only did he read it, he studied it and complained about everything. He was a pain in our rear. However, it became clear this guy had a passion for plan stuff and a real willingness to study, learn, understand and question. He was “the guy” other employees sought out if they had plan questions. We began to discuss adding him to the committee. At first there was considerable pushback because he had been such a nuisance, but it was clear he did his homework and took the subject matter seriously. We added him to the committee on an interim basis, despite some trepidation. Now the end of the story—he became the hardest working and, arguably, the most educated and dedicated committee member. He wanted to do the legwork, was willing to be a team player and, ultimately, was the biggest fan of the plan and supporter of its governance team.

What does the team or committee need to know?

The short answer to this question is the plan governance team must know enough to successfully run the plan. ERISA requires plan committee members be held to an expert standard in terms of their decision making with respect to the plan. This does not mean the committee members have to be expert in all topics, but they need to understand what they don’t know and when they need to enlist additional, expert-level support to make prudent decisions. At a minimum, committee members need a general understanding of the following tenets:

  • ERISA governance requirements;
  • Key plan document provisions;
  • Service providers duties, costs and contractual expectations; and
  • Reporting and compliance requirements.

Understanding what plan service providers do and don’t do is commonly a mystery to many plan committees. More service provider training and understanding is a common recommendation we make to plan committees.

Why are we hiring a fiduciary?

In recent years, many organizations have begun to offer various fiduciary services to retirement plans. Plan committees have many fiduciary support options from which to choose. One of the most important governance decisions a plan committee will ever make is whether to retain an outside fiduciary. There are right and wrong reasons to retain an outside fiduciary, and plan committee records and/or minutes should articulate the rationale for any fiduciary-related decision made by the committee. For example, a committee retaining an outside fiduciary to reduce committee members’ liability may be selecting a fiduciary for the wrong reason. Retaining a fiduciary to reduce the committee’s workload may be a valid reason to retain a fiduciary. Effectively, hiring a fiduciary doesn’t limit the committee’s liability; retaining a fiduciary merely changes the nature of the committee’s responsibilities to overseeing the retained fiduciary.

And it is important to remember that all fiduciaries are NOT created equal. There are important differences among providers that should be discussed and documented in the decision-making process, and reflected in service agreements. This is what I mean by being a good consumer of fiduciary services.

Conclusion

Good governance comes down to having the right people, with the right support following a consistent process, and documenting decisions and actions. It means asking probing questions and realizing when outside, nonconflicted support is necessary. The rationale for key decisions and the recording of such is as important as the decision itself.  Maintaining a solid governance process is the best strategy to help minimize the liability of the plan sponsor and plan committee, and provide participants with the best opportunity for successful retirement outcomes.

© Copyright 2019 Retirement Learning Center, all rights reserved
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Discretionary plan trustee vs. directed trustee

“What defines a discretionary plan trustee vs. a directed plan trustee?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Kentucky is representative of a common inquiry related to retirement plan trustees.

Highlights of the Discussion

ERISA Section 403(a) (see page 207 of linked information) provides that the assets of a qualified retirement plan must be held in trust by one or more trustees. The trustee will be either named in the plan document or appointed by a person who is a named fiduciary. The appointment of a plan’s trustee(s) is an important fiduciary decision that must be undertaken in a prudent manner by the plan sponsor or retirement plan committee with the proper authority.

Not all trustees, however, have the same authority or discretion to manage or control the assets of a plan. A trustee that has exclusive authority and discretion to manage and control the assets of the plan is a discretionary trustee. A discretionary trustee may be an employee of the company, but, more than likely, this role is outsourced to a third party.

However, a plan can expressly provide that the trustee is subject to the direction of a named fiduciary who is not a trustee. This is a directed trustee. The scope of a directed trustee’s duties is “significantly narrower than the duties generally ascribed to a discretionary trustee …” (Field Assistance Bulletin 2004-03). While a directed trustee is still a plan fiduciary, his or her fiduciary liability is limited, because he or she is required to act upon the direction of another plan fiduciary. The use of a directed trustee is a common plan model in the retirement industry. Many organizations serve as directed trustees.

“Direction” of the trustee is proper only if it is “made in accordance with the terms of the plan” and “not contrary to the Act [ERISA].” Accordingly, when a directed trustee knows or should know that a direction from a named fiduciary of the plan is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee should not, consistent with its fiduciary responsibilities, follow the direction.

Conclusion

There are two basic flavors of qualified retirement plan trustee: discretionary and directed. Check the terms of the governing plan document and trust agreement for a particular plan to determine which applies.

 

© Copyright 2019 Retirement Learning Center, all rights reserved