401(k) Plan Center

Four Steps to Fiduciary Success for Plan Committees

Four Steps to Fiduciary Success for Plan Committees

This report from Vanguard Investments describes the steps taken by successful investment committees.

Retirement plan fiduciaries have a level of responsibility that can sometimes seem overwhelming. Perhaps the single most important thing plan sponsors can do to fulfill their fiduciary duties is to have a well-organized and effective investment committee.

Every decision plan fiduciaries make should be done in the best interest of the participants; that should be the guiding force committees follow. In my years of experience working with defined contribution plan sponsors, I’ve found the most successful fiduciary committees: 

  • Have a clear appointment process of one or more committees, and specify the relationship to the company’s board of directors and executive management team or officers.
  • Structure the committee sensibly, including appropriate size, membership, designated responsibilities, and frequency of meetings.
  • Appoint qualified committee members and ensure appropriate ongoing training.
  • Document all committee actions and decisions.

 Here are more specifics to help you achieve each of these best practices.

 1. Appointment of the committee

 Sponsors can take different approaches to appointing a fiduciary committee. But whether individual members are named or executives with certain titles are designated, it’s important that committee members are well-positioned by their job responsibilities and expertise to function effectively.

 In addition to appointing a committee, the sponsoring employer should have a mechanism for overseeing it. For many of the clients I’ve worked with, the committee reports on a regular basis to a senior management team or the sponsoring organization’s board of directors.

 Under ERISA, members of the fiduciary committee are personally liable for their fiduciary decisions. To limit personal liability, it is critical that fiduciaries conduct themselves with an exceptional level of care—and senior management must provide appropriate oversight to their deliberations and decisions.

 2. Structure of the committee and regular meetings

 While small organizations commonly have one committee oversee all aspects of the plan, large organizations often have such complex plans that they create two committees: an administrative committee responsible for daily operations of the plan and an investment committee responsible for investment selection and monitoring.

 A committee might be as small as two or three individuals in a small firm, or a maximum of ten in a big company. When clients ask me about committee size, my advice is “less is more.” It’s better to have a smaller, well-identified committee than to place everyone involved with the plan on the committee. There should be a small, clear, and focused group of qualified individuals who know they are the plan’s fiduciaries—and are legally responsible for its operation and for making critical decisions.

 Frequency of meetings is very important, and should depend on plan size. Large organizations should meet at least quarterly, with the flexibility to make the meetings monthly or every other month—and to add meetings in cases of extraordinary market or plan events. Smaller plan sponsors, however, may find quarterly meetings unnecessary if plan administration is relatively simple and the investment program is operating well; instead, they may decide to meet semiannually or annually. That’s perfectly acceptable, as long as at least one of the plan fiduciaries provides regular oversight of investment or administrative issues.

 3. Qualification and training of fiduciaries

 Individuals chosen for the committee should have relevant experience—either in investments, plan administration, or both. They should be familiar with their duties and responsibilities under the law.

 Committee members should be chosen for the variety of perspectives they can provide on administrative and investment issues, the committee should generally not rely on a single individual as the source of expertise, and appointments should last at least five years to allow for continuity of thinking and oversight.

 4. Documentation

 The plan document or charter should define the committee structure and its responsibilities, and documentation should include: 

  • Number of members.
  • The required presence of senior officers.
  • The reporting relationship to senior management (or board, if applicable).
  • Selection and removal process of members.
  • Purpose and frequency of meetings.
  • Voting procedures and guidelines.
  • The procedure for generating minutes for each meeting.

When I mention documentation in client meetings, I sometimes see fear in the eyes of plan sponsors who think every tiny detail must be captured in writing. Relax! Framework, not detail, is most important. It’s critical to ensure that the committee is operating as the plan documentation describes. And when it comes to documentation, what’s most important is to have a clear and concise record of who attended the meeting, high-level descriptions of issues discussed, and action items agreed upon. Since litigants, courts, and regulators will look at meeting minutes when assessing cases of potential fiduciary breach, maintaining careful minutes and holding regular meetings can help plan fiduciaries focus on their duties while helping to minimize personal liability.

Client Note August 25, 2015
Participant Letter August 2015

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