As plan auditors, we review the governance structure of any plan as part of our procedures in evaluating the plan’s internal controls. In our experience, the best run plans have oversight provided by a retirement plan committee or similar oversight group. Many organizations might think their company (or plan) is too small to have such a committee, but we believe the benefits outweigh the costs. There are many perspectives on why a retirement committee is beneficial. This article shares why the auditors think it is worthwhile.
There are three main reasons for establishing and maintaining a retirement plan committee. The topmost reason is that it assists the plan sponsor in meeting the standards of conduct for plan fiduciaries established by the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets must be managed solely in the interest of participants and beneficiaries, with the care a prudent person would exercise. Establishing a committee with members of varying levels of experience and perspective is the start, and authorizing the committee to hire qualified service providers to assist in that duty is the next step. Exhibiting some best practices, such as adopting a charter, utilizing an investment policy statement, and maintaining minutes of meetings that outline the facts considered and the decisions made, all contribute to exhibiting that the sponsor is meeting its fiduciary obligations to the participants. This can be beneficial if litigation is ever brought against the fiduciaries of the plan by a disgruntled employee.
The second reason is a committee sets the tone at the top that the retirement plan is essential and signals to the management of the plan they are expected to take their responsibilities seriously. Having a committee sends the message that management is expected to run the plan effectively, with appropriate consideration to internal controls, compliance with regulations, and the safeguarding of participant funds, including identifying and responding to fraud risks involving the plan. The committee provides the oversight to ensure management is delivering against these expectations. The committee monitors that management has put a system in place to guarantee the availability and timeliness of information necessary for the committee to make important plan decisions, such as those related to investment holdings, fees, and plan amendments. The committee can hold management accountable for failure to run the plan correctly and can make changes where necessary promptly.
The third reason is that a committee that meets regularly can ensure that the plan is providing the benefit to employees that it was put in place to provide. Often the plan can be pushed to the wayside when the company is faced with other challenges to its operations. It is essential not to leave the plan to function independently (as often happens when most processes are outsourced to a third party). Regular meetings can ensure that focus is placed on what plan provisions might need to change to meet marketplace demand, what provisions are the most valuable to participants, and what provisions might need to be altered to account for changes in the company (such as acquisitions, layoffs, new divisions, etc.) Committee oversight can ensure these changes are periodically considered to be put in place in a timely manner that benefits the company.
Some things to consider in establishing a committee:
- Committee members should include a cross-section of individuals in the company, including representation from top management, human resources, finance, in-house legal counsel (if applicable) and also a participant who is not involved with plan management.
- The timing of the meetings is flexible and will likely be more frequent when the plan is larger. It should be no less than annually.
- Having ERISA counsel attend at least one of the meetings each year is good practice. In our experience, it is helpful to get an update of what is happening in the regulatory and legislative space from someone who knows your plan well and can identify the risks to your plan from a legal perspective.
- Periodic fiduciary training should be provided, especially when new members join the committee. Most advisors provide this service.
While not always considered, we also recommend the committee meet with the external auditors at least once per year. Ideally, the committee’s chair should communicate with the partner of the audit team before the audit commencing, and then the auditor should present the results of the audit to the whole committee once completed. This meeting allows the auditor the opportunity to communicate with the committee on any issues we discover, and to provide feedback, both positive as well as constructive, to assist in the oversight of plan operations.
Serving as evidence of meeting fiduciary obligations, setting the tone at the top, and maintaining the focus on essential benefits are all advantages to establishing a committee. We recommend plan sponsors make this a part of its plan governance structure.