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Jan. 25, 2017 Whitepaper

Establishing a Retirement Plan Committee

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Establishing a Retirement Plan Benefits Committee

The Employee Retirement Income Security Act (“ERISA”) is clear about the results that plan fiduciaries must achieve. Pursuant to ERISA Section 404, a plan fiduciary must:

  • Manage the plan for the exclusive purpose of providing benefits to plan participants and beneficiaries.
  • Manage the plan “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and like aim.” In short, fiduciaries are held accountable as a “prudent expert.”
  • Diversify the plan’s investments so as to minimize the risk of large losses, unless it is clearly prudent not to do so.
  • Always manage the plan in accordance with all plan documents as long as they are not inconsistent with ERISA.

ERISA is not as clear, however, about the manner in which to meet these goals. ERISA now requires a “process and compliance” driven management style rather than the traditional “value and results” format. Standards and best practices adopted for plan management should be enumerated in written form to create a clear process through which all fiduciaries may develop a plan of excellence. Frequently, the written document takes the form of a Benefits Committee Charter. The benefits committee (“Committee”) is a standing committee appointed by the board of directors of the sponsoring company. The charter outlines the responsibilities of the Committee with respect to the 401(k) retirement plan sponsored by the company.

Committees are established to simultaneously achieve three basic objectives:

  • Provide employees with a broad array of suitable investment options
  • Fulfill fiduciary responsibility
  • Manage risk and minimize the personal liability associated with managing a plan

Plan benefits committees, intending to reduce their fiduciary responsibility, frequently partner with an outside investment fiduciary service provider. While this type of relationship isn’t appropriate in every case, working with an outside provider can relieve the plan sponsor of many investment-related responsibilities. The shifting of fiduciary responsibility is the main benefit of working with an investment fiduciary service provider. Investment fiduciary service providers generally operate in one of two roles:

  • ERISA 3(21) “Co-Fiduciary” – The co-fiduciary provides investment recommendations and the ultimate investment decisions are shared with the benefits committee.
  • ERISA 3(38) “Investment Manager” - The investment manager is solely responsible for the selection, monitoring, and termination/replacement of the plan’s investment options.

The named fiduciary (benefits committee) is ultimately responsible for selecting the investment fiduciary service provider and reviewing their performance, fees, process and ability. The committee can never delegate fiduciary responsibility for appointing an investment fiduciary to carry out these duties. This responsibility is what obligates the plan sponsor to document its due diligence process in the selection of the investment fiduciary and the continued oversight and review of the investment fiduciary.

FORMAL ESTABLISHMENT

The Committee should be formally established in writing with its purpose and scope set out in the charter (see attached sample). The charter should outline the appointment and replacement process of Committee members. Committee members should consist of the number of individuals deemed necessary by the plan sponsor. Committee members will acknowledge their acceptance of the appointment to the plan sponsor in writing. Any member of the Committee may resign in writing at any time.

ESTABLISHING A RETIREMENT PLAN BENEFITS COMMITTEE SELECTION OF COMMITTEE MEMBERS

The Committee shall be the investment fiduciary responsible for prudently managing the investment portfolio and will assume the following responsibilities:

  • Have the exclusive authority to establish, execute and interpret an investment policy statement for the portfolio.
  • Be solely responsible for the selection and retention of professional advisors to the portfolio, which may include, but not be limited to, investment managers, investment consultants, custodians, attorneys, accountants and clerical staff.
  • Be solely responsible for the periodic monitoring of plan investments and advisors to the plan.

Committee members normally are senior members of Human Resources, Finance and Operations, and are normally headed by Chief Financial Officers or others who have an understanding of capital markets. It is recommended to keep investment committees small and to have an odd number of voting members, such as three to five members.

The Committee shall have an office of Chairman and a Secretary. The Chairman shall be responsible for conducting all of the meetings of the Committee and shall have voting rights the same as any other Committee member. The Chairman shall perform such other duties as the Committee may assign and shall be the designated Agent for service of legal process. The Secretary shall be responsible for keeping minutes of the transactions of the Committee and shall be the official custodian of records of the Committee. The Secretary, together with the Chairman, shall execute all official contracts of the Committee. The Secretary shall compile Committee agendas. The Chairman and Secretary are authorized by the Committee to execute any instruments necessary for the Committee to conduct business.

Each member’s acceptance in the Committee, along with his or her positions and duties, should be formally documented in writing.

All Committee members should be educated on the fundamentals of ERISA. This should include an understanding of a fiduciary’s duties, plan procedures and service provider’s contracts. The plan documents should also be reviewed to understand the plan’s investment strategy and the process for vendor and investment selection. Committee members must understand that ignorance, bad communications, or inexperience are not adequate legal defenses should the plan fall into question.

Committee members should be aware that they have corporate and personal fiduciary liability. Each member should thoroughly understand his or her fiduciary responsibility as well as thoroughly understand the investment review components. When new members are added, they too should be trained to understand their fiduciary responsibility and fund monitoring process. It is a mistake to assume all members understand these issues. They need to be taught.

HOW DOES THE COMMITTEE FUNCTION?

The Committee shall set its own schedule of meetings. Special meetings may be called by the Chairman or by a majority of the Committee members. It is recommended the Committee meet at least once each quarter. In recognition of the importance of the work of the Committee, regular attendance at the Committee meetings is expected from all members. A majority of the members of the Committee at the time in office shall constitute a quorum for the transaction of business.

An agenda shall be prepared for each regular and special meeting of the Committee. The agenda shall set forth those items upon which the Committee anticipates taking action or discussing. Each agenda item shall have attached backup material necessary for discussion or action by the Committee. A copy of the agenda and backup material shall be furnished to each Committee member prior to commencement of the meeting.

Full and complete minutes detailing records of deliberations and decisions shall be maintained and held by the Secretary. The Secretary shall record all acts and determinations of the Committee, and all such records shall be preserved in the custody of the Secretary. Such record and documents shall be open at all times for inspection by Committee members or for the purpose of making copies by any person designated by the Sponsor.

WHAT TOPICS ARE COVERED IN AN COMMITTEE MEETING?

Objectives and responsibilities of an investment committee include:

  • Develop an Investment Policy Statement (“IPS”) and document all decisions made.
  • Establish a formal process to manage investment strategies.
  • Initiate investment decisions.
  • Analyze and monitor investment related expenses.
  • Establish due diligence procedures for selecting and monitoring investments.
  • Review the activities of “prudent experts.”
  • Review the investment management fees paid by the plan and participant

CONCLUSION

While a formalized Benefits Committee does not guarantee there will never be lawsuits filed against plan sponsors and their fiduciaries, it does provide an effective basis from which to build a defense. Companies that sponsor retirement plans can reduce personal liability and achieve a plan of excellence by having standards and best practices. A major part of best practices is to set up a Benefits Committee.

This document is for informational use only. Nothing in this presentation is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Retirement Advisors does not warrant the accuracy of the information. Consult a financial, tax, or legal professional for specific information related to your own situation.

Mariner Retirement Advisors (“MRA”) is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment advisor does not imply any level of skill or training. MRA and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which MRA maintains clients. MRA may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by MRA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about MRA, including fees and services, please contact MRA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you invest or send money.