Best Practice #8: Adopting a Fiduciary Governance Program

December 21, 2016—Welcome to the Alliant Best Practices Series for 401(k) Plan Sponsors, in which we offer 10 best-practice essentials for helping plan participants achieve retirement plan success. Here’s the eighth best practice in our series.

“If you fail to plan, you are planning to fail!”

– Benjamin Franklin

In our last post we discussed the importance of establishing a regular fee comparison and review process to protect employers and plan participants from overcharging by service providers, and to preventatively ward off Department of Labor (DOL) investigations or fines, as well as potential lawsuits by employees.

Today we will be talking about establishing a program for fiduciary governance – i.e., creating a program that defines the roles and responsibilities of those who oversee and manage your corporate retirement plan, as well as processes and tasks for their committee meetings. This is very important, as the DOL – empowered by the federal Employee Retirement Income Security Act (ERISA) – has the authority and incentive to investigate employers for non-compliance.

The first and most important perspective to adopt is that ERISA compliance is the highest priority. ERISA regulations should be regarded as the floor – or the bare minimum – that employers should aim to meet. Of course, ERISA regulations are primarily designed to protect plan participants. This means that aiming for ERISA compliance is in effect the same as aiming to create the best environment and outcomes for plan participants.

Establish a Retirement Plan and Investment Committee

Creating a Retirement Plan Committee should be the first formal step regarding fiduciary governance. The members of this committee should be medium- to high-ranking managers from your company who have a moderate to high degree of competence and involvement in the company’s retirement plan. At minimum, those who are the final decision-makers or who strongly influence decisions made to the retirement plan should be on this committee.

Beyond the above requirements, the number of members may vary depending on the size of your company and the plan. Some committees have the same members every year. Others have several core members, and then rotate out several others members to keep the periodically inject the meetings with fresh insight.

Beyond the Retirement Plan Committee, you will also need to establish an Investment Committee. This was the subject of our Best Practices #6: Establishing a Strong Investment Committee – refer to it to learn more!

Who is a fiduciary?

You should be aware of who in your company is a fiduciary. At minimum, the law defines a retirement plan fiduciary as a person who:

  1. “Exercises any discretionary authority or discretionary control respecting management of such plan, or exercises any authority or control respecting management or disposition of its assets.”
  2. “Renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.”
  3. “Has any discretionary authority or discretionary responsibility in the administration of such plan.”

It is also in your interest to know that there are several different types of fiduciaries:

  1. Named Fiduciary. This is a fiduciary who is actually named in plan documents.
  2. Governing Fiduciary. This is fiduciary is on the Board of Directors. Note: Fiduciary Liability is not typically covered by Directors’ and Officers’ Insurance.
  3. Functional Fiduciary. This type of fiduciary is one whose role is effectively a fiduciary, even if he or she is not explicitly defined as such in any document, and even if he or she is not a member of the retirement plan committee.

Warning: if you fail to define the fiduciaries for your plan, the Department of Labor will define them for you – and possibly in a way that increases your potential liability beyond your initial expectations!

For this reason, it is in the best interests of company managers to always clearly define the roles and responsibilities of each fiduciary in plan documents, meeting minutes, and so forth. It is a truly unfortunate situation when the DOL comes knocking on the door and asks which person operates in a given fiduciary capacity, only to find unprepared people pointing fingers at each other in confusion! This gives the appearance that the plan’s fiduciary governance is uncoordinated, and is a red flag that much may be amiss with the plan or its management!

Implement Regular Processes for Your Retirement Plan Committee

After you have selected the fiduciaries of your committee, you should set up a list of processes and tasks the committee will perform, as well as the timeline and frequency in which they will occur. Some examples are as follows:

  • Review plan design. This is usually done annually.
  • Review service providers. This especially includes reviewing their fees, as well as scouting for any potential conflicts of interest. Depending on the service provider, this may be done annually or every few years. If fee reasonableness becomes a serious issue, however, it will need to be addressed within the next committee meeting. We discussed establishing a fee comparison and review process in detail in our Best Practices #7: Know Your Fees Are Reasonable.

On top of this, you should also create a compliance checklist and diligently follow through with checking off each item on every meeting. As examples, in each meeting committees will ideally review the following to ensure everything is on track:

  • Plan documents.
  • Service agreements.
  • Plan investments.
  • Compliance with participant communication and education requirements, including:
    • 404(c) notices.
    • 404(a)(5) annual participant notices.
    • 404(c)(5) QDIA notices.
  • 408(b)(2) Compliance – particularly important as the DOL, since 2012, has increasingly ramped up scrutiny toward employers regarding the reasonableness of fees of all service providers.
  • The plan’s fidelity bond: is it still adequately protecting plan participants?

Next up: Adopt Available “Trust” Safe Harbors. Many employers are interested in mitigating their liability by adopting all available ERISA Safe Harbors. We will discuss this subject in detail in our next post – stay tuned!

Do you like what you’ve read so far in our Best Practice Series for 401(k) Plan Sponsors? We also offer a complimentary presentation to further explore these best practices with you and other key retirement-plan decision-makers at your company. Please contact us to learn more.

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.