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Are Plan Committee Members Fiduciaries?

An advisor asked: “Can an individual member of a 401(k) plan committee have personal fiduciary liability?”

ERISA consultants at the Retirement Learning Center (RLC) 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 an advisor in Indiana is representative of a common question on plan committee members.

Highlights of the Discussion

  • A plan committee member may be a plan fiduciary and, consequently, held personally liable to the plan if he or she is granted or exercises discretion in the operation or administration of a retirement plan that is subject to the Employee Retirement Income Security Act of 1974 (ERISA).
  • According to the Department of Labor (DOL) Interpretive Bulletin 75-5, if the governing plan documents state the plan committee controls and manages the operation and administration of the plan and specifies who shall constitute the plan committee (either by position or by naming individuals to the committee), then such individuals are named fiduciaries of the plan pursuant to ERISA §402(a) (see page 212 of linked document).
  • A number of court cases have found that a plan committee member may be a functional fiduciary of the plan because of his or her actions and subject to personal liability if he or she exercises discretion in the administration of the plan Gaunt v. CSX Transp., Inc., 759 F. Supp. 1313 (N.D. Ind. 1991).
  • Pursuant to ERISA §409 (see page 250 of linked document):

Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries … shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.

  • Having a committee charter may help mitigate fiduciary liability for the committee members by carefully outline the members roles and responsibilities. Please see our Case of the Week 401(k) Plan Committee Charter for best practices.

Conclusion

A plan committee member may be a plan fiduciary and, consequently held personally liable to the plan for losses resulting from fiduciary breaches.  Having a committee charter may help mitigate fiduciary liability for the committee members.

© Copyright 2021 Retirement Learning Center, all rights reserved
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Cybersecurity and Retirement Plans—What’s the Latest?

Can you bring me up to speed on what cybersecurity standards apply to qualified retirement plans?”

ERISA consultants at the Retirement Learning Center (RLC) 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 an advisor in Massachusetts is representative of a common question on what the Department of Labor (DOL) has to say about cybersecurity and retirement plans.

Highlights of the Discussion

Cybersecurity has been a growing topic of importance in the retirement services industry for years. The Bartnett v Abbott Labs et al  court case in 2020 (although later dismissed), along with other cases, have heightened the concern for fiduciary liability related to such breeches. From a historical perspective, there is an understanding under DOL    Regulation Section 2520.104b-1(c)(i)(B)   and other pronouncements related to the electronic delivery of plan information that a plan sponsor must ensure the electronic system it uses keeps participants’ personal information relating to their accounts and benefits confidential.

Most recently, the DOL on April 14, 2021, issued three cybersecurity directives for retirement plans: one for plan sponsors, one for plan recordkeepers and one for plan participants:

  • Tips for Hiring a Service Provider: This piece helps plan sponsors and fiduciaries prudently select a service provider with strong cybersecurity practices and monitor their activities, as required by ERISA
  • Cybersecurity Program Best Practices: This piece assists plan fiduciaries and record-keepers in their responsibilities to manage cybersecurity risks by following these steps.
  1. Have a formal, well documented cybersecurity program.
  2. Conduct prudent annual risk assessments.
  3. Have a reliable annual third-party audit of security controls.
  4. Clearly define and assign information security roles and responsibilities.
  5. Have strong access control procedures.
  6. Ensure that any assets or data stored in a cloud or managed by a third-party service provider are subject to appropriate security reviews and independent security assessments.
  7. Conduct periodic cybersecurity awareness training.
  8. Implement and manage a secure system development life cycle (SDLC) program.
  9. Have an effective business resiliency program addressing business continuity, disaster recovery, and incident response.
  10. Encrypt sensitive data, stored and in transit.
  11. Implement strong technical controls in accordance with best security practices.
  12. Appropriately respond to any past cybersecurity incidents.
  • Online Security Tips: This piece offers plan participants and beneficiaries who check their accounts online basic rules to reduce the risk of fraud or loss.

This trifecta of DOL guidance comes on the heels of two recommendations to the DOL from a February 2021 Government Accountability Office (GAO) report to: 1) formally state whether it is a fiduciary’s responsibility to mitigate cybersecurity risks in defined contribution plans and to 2) establish minimum expectations for addressing cybersecurity risks in defined contribution plans. But despite the release of these three directives, presently, there is no comprehensive federal regulatory regime covering cybersecurity for retirement plans.

Other Sources of Guidance to Consider

The American Institute of CPAs (AICIPA) has developed and maintains a cybersecurity risk management program for use by plan auditors, which includes a Systems and Organizations Controls (SOC) protocol intended to help plan sponsors in creating a strong cybersecurity framework .  This Q&A, “Cybersecurity and employee benefit plans: Questions and answers,” provides an overview of the resources.

The ERISA Advisory Council issued a report in 2016 entitled, “Cybersecurity Considerations for Benefit Plans.” The ERISA Advisory Council suggested the DOL raise awareness about cybersecurity risks and provide information for developing a cybersecurity strategy specifically focused on benefit plans. “The Report” put forth considerations for the industry for navigating cybersecurity risks. The considerations relate to the following three key areas. Please refer to the report for more details.

  1. Establish a strategy
  • Identify the data (e.g., how it is accessed, shared, stored, controlled, transmitted, secured and maintained).
  • Consider following existing security frameworks available through organizations such as the Nation Institute of Standards and Technology (NIST), Health Information Trust Alliance (HITRUST), the SAFETY Act, and industry-based initiatives.
  • Establish process considerations (e.g., protocols and policies covering testing, updating, reporting, training, data retention, third party risks, etc.).
  • Customize a strategy taking into account resources, integration, cost, cyber insurance, etc.
  • Strike the right balance based on size, complexity and overall risk exposure.
  • Consider applicable state and federal laws.
  1. Contracts with service providers
  • Define security obligations.
  • Identify reporting and monitoring responsibilities.
  • Conduct periodic risk assessments.
  • Establish due diligence standards for vetting and tiering providers based on the sensitivity of data being shared.
  • Consider whether the service provider has a cyber security program, how data is encrypted, liability for breaches, etc.
  1. Insurance
  • Understand overall insurance programs covering plans and service providers.
  • Evaluate whether cyber insurance has a role in a cyber risk management strategy.
  • Consider the need for first party coverage.

The Report concludes with an appendix entitled, Employee Benefit Plans:  Considerations for Managing Cybersecurity Risks (A Resource for Plan Sponsors and Service Providers).

State laws are another consideration. Each state has different laws governing cybersecurity concerns that may come into play. Unfortunately, many retirement plans cover multiple states or retirees who have moved out of state.

Conclusion

As fiduciaries of their retirement plans, the DOL requires plan sponsors to ensure the electronic systems they authorize for use in the administration of their plans keeps participants’ personal information relating to their accounts and benefits confidential. While currently no comprehensive cybersecurity protocol for retirement plan administration exists at the federal level—we do have a series of guidelines, suggestions and best practices.

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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Are Governmental Plans Exempt from ERISA?

“I have a colleague that says governmental retirement plans are exempt from ERISA and one that says they are not. Can you settle the argument? Are retirement plans maintained by governmental entities exempt from ERISA?”

ERISA consultants at the Retirement Learning Center (RLC) 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 an advisor in Wisconsin is representative of a common question on the Employee Retirement Income Security Act of 1974 (ERISA) and retirement plans maintained by governmental entities.

Highlights of the Discussion

  • Yes and no; both answers are partially correct. ERISA consists of five sections or “Titles:”
    • Title I: Protection of Employee Benefit Rights
    • Title II: Amendments to the Internal Revenue Code Relating to Retirement Plans
    • Title III: Jurisdiction, Administration, Enforcement; Joint Pension Task Force, Etc. and
    • Title IV: Plan Termination Insurance
  • Generally, governmental retirement plans are fully exempt from Titles I and IV of ERISA. Those titles cover fiduciary duties, reporting and disclosure requirements, and termination insurance from the Pension Benefit Guaranty Corporation [ERISA Secs. 4(b)(1) and 4021(b)(2)].
  • A few of the provisions of Title II of ERISA apply to governmental plans. Title II relates to the portion of ERISA that amended the Internal Revenue Code and includes certain plan qualification requirements like limits on plan contributions.
  • Governmental plans are subject to Title III of ERISA, which contains procedures for co-coordinating enforcement efforts between the Department of Labor and Treasury Department.
  • While governmental plans are exempt from the federal fiduciary requirements of Title I of ERISA, they are subject to any fiduciary requirements imposed by applicable state laws. For example, California Government Code Section 53213.5 applies fiduciary standards and responsibilities to plans of governmental entities that essentially mirror those fiduciary standards and responsibilities in Title I of ERISA. Similarly, Florida imposes a federal-like fiduciary standard on plan officials under Florida Statute 112.656.
  • Other state statutes have fiduciary provisions that may be different than federal fiduciary rules. A sponsor of a governmental plan must be familiar with the fiduciary standards of its state, as well as other state laws that may affect the operation of its plan.

Conclusion

As a rule, retirement plans of governmental employers are exempt from the federal fiduciary requirements imposed under Title I of ERISA, as well as the plan termination insurance requirements under Title IV.  However, it is important for plan sponsors and others who may have discretionary authority over governmental plans to consider any fiduciary requirements and other legal requirements under applicable state law.

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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Five-Part Test Involves Reasonable Understanding

“Can you give me real-world insight into the five-part test the Department of Labor (DOL) will apply for determining whether an advisor or firm is giving fiduciary investment “advice?”

ERISA consultants at the Retirement Learning Center (RLC) 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 an advisor in North Carolina is representative of a common question on what constitutes investment advice.

Highlights of the Discussion

To determine whether investment guidance rises to the fiduciary level of investment advice, the DOL and IRS will apply the following five-part test (see PTE 2020-02  and IRS FAQs on PTE 2020-02. If the answer is “yes” to all five of the following test questions, and the advisor receives payment for the advice, he or she is an investment advice fiduciary, and would have to follow a prohibited transaction exemption (PTE) (e.g., PTE 2020-02) to receive payment for the advice.

Five-Part Test Questions

Consideration:  Authorities will consider written statements disclaiming any element of the five-part test but the disclaimers will not in and of themselves be determinative of fiduciary status. Firms and investment professionals cannot use written disclaimers to undermine reasonable investor understandings.

Yes No
1.    Will the advisor render advice to the plan, plan fiduciary, or IRA owner as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property? 

 

Consideration:  Advice could include a recommendation to an investor to conduct a rollover. A recommendation to roll assets out of a retirement plan is advice with respect to moneys or other property of the plan and, if provided by a person who satisfies all of the requirements of the five-part test, constitutes fiduciary investment advice.

2. Will the advice be given on a regular basis?

Considerations:  Whether advice to rollover assets from a workplace retirement plan to an IRA constitutes advice “on a regular basis” depends on whether the advice

·         Is a single, discrete instance;

·         Occurs as part of an ongoing relationship; or

·         Occurs at the beginning of an intended future ongoing relationship that an individual has with an investment advice provider.

3. Is the advice given pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner?

Consideration:  When making a determination on this question, the DOL intends to consider the reasonable understandings of the parties based on the totality of the circumstances.

4.  Will the advice serve as a primary basis for investment decisions with respect to plan or IRA assets? 

Consideration:  The recommendation need only be “a” primary basis for investment decisions—not necessarily “the” primary basis for investment decisions—before it would deem to satisfy this prong of the five-part test.  If the parties reasonably understand that the advice is important to the investor and could affect the investor’s decision, that is enough to satisfy the primary basis requirement.

5.  Will the advice be individualized based on the particular needs of the plan or IRA?

Consideration: Put another way, is the advisor making an individualized recommendation to an investor upon which he or she will rely on to make an investment decision? Here again, the DOL will look at the reasonable understandings of the parties based on the totality of the circumstances.

 

Conclusion

Although the DOL’s five-part test for fiduciary investment advice may seem straightforward, there are important subtleties that come into play.  The DOL will consider the reasonable understandings of the parties based on the totality of the circumstances.

 

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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Requesting Plan Documents—What’s Included?

“I’ve been working with a 401(k) plan committee on governance issues. A participant has requested copies of plan committee meeting minutes and notes for the last four quarters. Does the committee have to comply with this request?”

ERISA consultants at the Retirement Learning Center (RLC) 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 an advisor in North Carolina is representative of a common question related to plan documents.

Highlights of the Discussion

The answer is—maybe. One thing is sure—whatever the plan officials decide, there should be documentation in the plan files as to the reason for their decision. The documentation will be important should litigation arise.

Section 104(b) of the Employee Retirement Income Security Act of 1974 (ERISA) requires plan officials to provide the following documents within 30 days of a plan participant’s request:

  • Summary plan description,
  • The latest annual report,
  • Any terminal report,
  • The bargaining agreement,
  • The trust agreement,
  • Contract, and
  • “Other instruments” under which the plan is established or operated.

The plan administrator may charge a reasonable fee to cover the cost of furnishing such copies.

Committee meeting minutes and notes are not explicitly listed in these ERISA disclosure requirements. The Department of Labor (DOL) has issued some guidance on the matter, but nothing definitive. In Advisory Opinion 96-14A, issued on July 31, 1996, the DOL stated, “ … any document or instrument that specifies procedures, formulas, methodologies, or schedules to be applied in determining or calculating a participant’s or beneficiary’s benefit entitlement under an employee benefit plan would constitute an instrument under which the plan is established or operated.”  The DOL reiterated this stance in Advisory Opinion 1997-11A.

Thus, it could be argued if benefit-related decisions were made or even discussed at committee meetings then the minutes, or at least applicable portions of the minutes, would have to be provided. This issue is clearly open to interpretation and argument, and there have been legal cases where courts have differed on their rulings as to the treatment of committee meeting minutes. For example, in Faircloth v. Lundy Packing Co., 91 F.3d 648, 654–55 (4th Cir. 1996), cert. denied, 519 U.S. 1077 (1997); and Brown v. American Life Holdings, Inc., 190 F.3d 856, 861 (8th Cir. 1999) the courts found that plan officials were not required to disclose committee minutes. Whereas, in Bartling v. Fruehauf Corp., 29 F.3d 1062 (6th Cir. 1994) and Hughes Salaried Retirees Action Committee v. Admin. of the Hughes Non-Bargaining Retirement Plan, 72 F.3d 686, 689 (9th Cir. 1995) (en banc) the courts concluded that “other instruments” should be construed more broadly to include such items as committee minutes.

Consequently, a committee facing a participant’s request for meeting minutes should, as expeditiously as possible (remembering the 30-day requirement to provide and penalty of $110 per day for late responses), seek legal counsel for direction and guidance.

Conclusion

ERISA requires plan officials provide certain plan documents upon participant request.  There is some uncertainty as to the treatment of committee meeting minutes in this context. Seeking legal counsel would be a prudent course of action, and documenting the decision would be a fiduciary best practice.

© Copyright 2021 Retirement Learning Center, all rights reserved
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The Line Between Education and Fiduciary Advice

Does the industry have a clear definition of what the Department of Labor (DOL) would consider investment education (not advice) in a 401(k) plan so that a financial advisor would not have to follow the requirements of Prohibited Transaction Exemption (PTE) 2020-02?

ERISA consultants at the Retirement Learning Center (RLC) 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 an advisor in Minnesota is representative of a common question related to investment education.

Highlights of Recommendations

The DOL believes it provides a clear roadmap for determining when financial advisors are, and are not, investment advice fiduciaries under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) in PTE 2020-02 and Interpretive Bulletin (IB) 96-1. 

“Oldie but goodie” DOL IB 96–1 identifies four categories (or “safe harbors”) of investment-related educational materials that advisors or others can provide to plan participants and beneficiaries without being considered to have provided fiduciary investment advice: 1) Plan information, 2) General Financial and Investment Information, 3) Asset Allocation Models and 4) Interactive Investment Materials.

Plan Information

Information about the benefits of plan participation, the benefits of increasing plan contributions, the impact of preretirement withdrawals on retirement income, the terms of the plan, the operation of the plan, or descriptions of investment alternatives under the plan would not constitute investment advice.

General Financial and Investment Information

General financial and investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax-deferred investment; historic differences in rates of return between different asset classes (e.g., equities, bonds, or cash) based on standard market indices; effects of inflation; estimating future retirement income needs; determining investment time horizons; and assessing risk tolerance would not constitute investment advice.

Asset Allocation Models

Examples would include pie charts, graphs, or case studies that provide a participant or beneficiary with asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles.  Such models must satisfy the following requirements.

  1. The models must be based on generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over define periods of time.
  2. All material facts and assumptions on which such models are based (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) must accompany the models.
  3. To the extent that an asset allocation model identifies any specific investment alternative available under the plan, the model must be accompanied by a statement that
    • Indicates that other investment alternatives having similar risk and return characteristics may be available under the plan;
    • Identifies where information on those investment alternatives may be obtained; and
    • Discloses that, when applying particular asset allocation models to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and non-qualified plans) in addition to their interests in the plan.

Interactive Investment Materials

Examples in this category could include, but are not limited to, questionnaires, worksheets, software, and similar materials that provide a participant or beneficiary the means to estimate future retirement income needs and assess the impact of different asset allocations on retirement income.

Such materials must

  1. Be based on generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over defined periods of time;
  2. Contain an objective correlation between the asset allocations generated by the materials and the information and data supplied by the participant or beneficiary;
  3. Include all material facts and assumptions (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) that may affect a participant’s or beneficiary’s assessment of the different asset allocations (Note: These facts and assumptions could be specified by the participant or beneficiary);
  4. (To the extent they include an asset allocation generated using any specific investment alternatives available under the plan), include a statement indicating other investment alternatives having similar risk and return characteristics may be available under the plan and where information on those investment alternatives may be obtained; and
  5. Take into account or are accompanied by a statement indicating that, in applying particular asset allocations to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and nonqualified plans) in addition to their interests in the plan.

While the provision of investment education is not a fiduciary act, the designation of a person or entity to provide investment educational services to plan participants and beneficiaries is a fiduciary act. Therefore, persons making this designation must act prudently and solely in the interest of the plan participants and beneficiaries.

Conclusion

The DOL provides examples of investment education in IB 96-1 that, when delivered, would not be considered investment advice, thereby helping the educator to avoid fiduciary liability for the information. However, the act of selecting the individual or entity to provide investment education to 401(k) plan participants and beneficiaries is a fiduciary act, subject to the standards of loyalty and prudence.

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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American Depositary Receipts and Shares

“My client is asking me about ADRs and whether he can invest in them through his 401(k) plan. Can you explain, please?”

ERISA consultants at the Retirement Learning Center (RLC) 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 Indiana is representative of a common inquiry related to 401(k) plan investments.

Highlights of the Discussion

Think of an ADR as similar to a stock certificate that represents ownership of a share in a company. An ADR, which stands for American Depositary Receipt, is a negotiable certificate that represents an ownership interest in American Depositary Shares (ADSs). ADSs are shares of a non-U.S. company that are held by a U.S. depository bank or custodian outside the US, and made available for sale on a US stock exchange or over-the-counter market.

ADRs are registered in the US with the Securities and Exchange Commission (SEC), trade in US dollars and clear through US settlement systems, allowing ADR holders to avoid transacting in a foreign currency. Transactions are generally performed by brokers and other types of investors who are active in foreign securities markets. According to the SEC, the stocks of most foreign companies that trade in the US markets are traded as ADRs.

It is possible that a 401(k) plan could offer the ability to invest in ADRs, however, a plan sponsor must first decide whether such an investment option would be prudent from a fiduciary stand point to offer in the plan and, if so, make sure there is accommodating plan language.

Investors who may be interested in ADRs should learn all they can and consult with a financial advisor regarding specific questions. The SEC has introductory information on ADRs in its Investor Bulletin: American Depositary Receipts.

Conclusion

ADRs represent shares of foreign companies traded in US dollars on US exchanges. It is a popular and streamlined way to invest in non-US companies. For additional background information, please see the following material:

SEC Regulation of American Depositary Receipts

 

 

 

© Copyright 2021 Retirement Learning Center, all rights reserved
Governance
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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 2021 Retirement Learning Center, all rights reserved
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What is a “flexible” ERISA 3(38)

“Is there such a thing as a ‘flexible’ ERISA 3(38) fiduciary?”  

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 New Hampshire is representative of a common inquiry related to ERISA fiduciary services.

Highlights of the Discussion

According to a strict reading of ERISA and its regulations under 29 U.S.C. Title 29 §3(38)—no; there is no such legally defined entity. However, in practice, there are ERISA 3(38) fiduciary services that are advertised as “flexible.” Let’s start with the definition of an ERISA §3(38) plan fiduciary. An ERISA 3(38) fiduciary is an investment manager that is a registered investment advisor (e.g., RIA, bank or insurance company), appointed by the plan sponsor to fully manage the assets of the plan. Such individual or entity has the power to manage, acquire, or dispose of any asset of a plan; is responsible for selecting, monitoring and replacing plan investment options; and has full discretion regarding a plan’s investment management process. When the 3(38) fiduciary is appointed, a written agreement must be executed acknowledging the 3(38)’s fiduciary responsibility for managing the assets of the plan. ERISA 3(38) relieves the plan sponsor of fiduciary liability with respect to the selection, performance, monitoring and replacement of the investments for a plan when the sponsor has prudently selected the 3(38) investment manager; and the sponsor continues to monitor the 3(38)’s services. As one can see, the strict definition of an ERISA 3(38) does not seem to leave room for too much, if any, flexibility.

A few firms that offer 3(38) services have added the “flexible” moniker or adjective to describe situations where the plan sponsor can provide the 3(38) investment manager with “suggestions” regarding the investment line up. These plan sponsor suggestions could range widely from encouraging the 3(38) to take over and assume responsibility for an existing investment line up; providing input on investments the plan sponsors would like the 3(38) to add to the 3(38)’s available options; or having the ability to select from a broad universe of investments that are within the 3(38)’s fiduciary coverage universe to create the investment line up. The gnawing question becomes has the plan sponsor exerted discretion over the investment decisions and, thereby, clawed back some of the fiduciary responsibility it sought to relinquish? There is no clear answer. It is another one of those “facts and circumstances” situations the DOL and courts would evaluate on a case by case basis. But it is important to be aware of and take into consideration when making a decision that flexibility can muddy the fiduciary liability and relief waters.

Conclusion

Some firms advertise a flexible 3(38) investment management solution. Plan sponsors and their advisors should be sure they 1) understand what precisely the flexibility is; 2) evaluate if it could potentially affect liability; 3) make a prudent, educated decision based on the information; and 3) record the decision making process for their fiduciary process records.

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401(k) Plan Committee Charter

“If a 401(k) plan has an investment or administrative committee, is the committee required to have a charter?”

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 Ohio is representative of a common inquiry related to 401(k) plan committees.

Highlights of the Discussion

Neither the Department of Labor (DOL) nor the IRS, both of which regulate qualified retirement plans, specifically require that a 401(k) plan committee have a charter. However, more and more firms with plan committees are adopting committee charters as a fiduciary best practice. Practically speaking, a committee charter can help committee members understand their roles and responsibilities.

Retirement plan committee charters are distinct from an investment policy statement. (Please see Investment Policy Statement Checklist and an Education Policy Statement.)

A plan committee charter should be approved by the board of directors of the company and answer the following questions:

  • What authority does the committee have?
  • What is the committee’s purpose?
  • How is the committee structured?
  • Who may serve on the committee?
  • How are committee members replaced?
  • How will the committee delegate authority?
  • How will the committee assign responsibilities and duties?
  • How frequently will the committee meet?
  • What procedures will the committee follow?
  • What are the standing agenda items and how are new topics introduced?
  • What is the process for selecting and managing plan service providers?
  • What reporting will the committee do and to whom?
  • What are the procedures for protecting committee members financially?

Retirement plan committees that do have charters should be sure to follow them, and review them regularly to determine if adjustments are needed.

Here is a sample format:

  • Introduction
  • Purpose of the Plan Committee
  • Committee Membership
  • Schedule and Organization of Meetings
  • Authority and Responsibilities
  • Procedures for Decision Making
  • Meeting Minutes and Reports
  • Fiduciary Liability and Protection

Conclusion

For retirement plans that have investment or administrative committees, having a committee charter in place could be a good fiduciary liability mitigation tactic—as long as it is followed.

© Copyright 2021 Retirement Learning Center, all rights reserved