by Scott Matheson
As CAPTRUST’s defined contribution practice leader, I am privileged to meet with many of our plan sponsor clients. Our national network of more than 1,500 plan sponsors in too many industries to list—with plan sizes ranging from several million to several billion dollars—provides us, as a firm, with a unique perspective on what a colleague calls combustible issues. These are the complex and sometimes controversial topics that can intimidate or paralyze plan sponsor decision making. In this article, I’d like to share a few observations gleaned from our work on one particular combustible issue related to fiduciary best practices.
Before I share any observations, I will admit that our sample set is biased. It is biased by the fact that these plan sponsors all work with us, and we are not shy about giving advice that shapes what they do. It is biased also in that our clients have all hired a retirement plan advisor. Our sense is that most plan sponsors work with advisors because they understand their fiduciary duties. They recognize a need for help—and may even want to outsource key aspects of plan management.
The duties I’m referring to are those prescribed by the Employee Retirement Income Security Act of 1974 (ERISA). In brief, ERISA states that fiduciaries have the duty to make decisions in the best interest of participants and beneficiaries, including the duties of:
- being prudent,
- exercising loyalty and impartiality,
- monitoring and supervising,
- ensuring reasonable plan costs, and
- avoiding prohibited transactions.
While these duties are well articulated in the law, the most effective way to fulfill them varies by plan sponsor and evolves over time. The most common fiduciary process we recommend our clients apply incorporates the following aspects:
- Fiduciary committee—A group of employees that has been carefully selected, granted authority, and charged with the responsibility to make decisions in the best interest of plan participants;
- Shared purpose—A common understanding of goals, roles, and responsibilities to align all parties that interact in the ongoing operation of and decision making for their retirement plan;
- Guiding document—Usually in the form of an investment policy statement (IPS), that provides meaningful direction to these individuals, without hampering their ability to apply fiduciary judgment;
- Ongoing oversight—A framework for monitoring ongoing plan operations in light of the governing plan documents, and;
- Decision documentation—A process for capturing and documenting committee decisions and actions taken.
I could write countless pages on each of the five facets listed above. But the combustible issue clients ask about most often—and the one that varies most across our client base—is committee composition and plan governance. I’d like to share a collection of lessons from committees we’ve had privilege to work with over the past 26 years.
Establishing a Fiduciary Committee
Every plan sponsor names a party as plan fiduciary. This is true even for sponsors without a committee. Note that while there is no legal requirement that a plan sponsor form and maintain a committee to oversee its retirement plan, this approach to plan oversight has become a best practice in most mid-sized and larger organizations. Plan sponsors who form committees do so to involve internal subject matter experts who can add to the committee’s expertise and enhance its ability to fulfill its fiduciary duties. Who is designated as a named fiduciary of the plan is a plan design question that touches on matters of organizational liability. That decision should be made in consultation with legal counsel.
If a plan sponsor wishes to create a committee, it is critical that it be formed in such a way that the committee is granted both the authority and responsibility for fiduciary oversight and decisions. This may include executing board of directors or trustees resolutions to grant that authority.
Forming a retirement plan committee would take less deliberation if only ERISA or the Department of Labor had laid out requirements for committee composition. Unfortunately, it’s not that simple. Plan sponsors are tasked with sorting this out for themselves, and the decisions on who to include vary by organization.
Looking across our client base, we note that most committees include professionals from finance or treasury, human resources, and operations. Some committees include representation from their legal departments. However, having legal representatives sit on committees demands thoughtful consideration as it pertains to who they would be representing in the event of litigation. Often, legal counsel serves in an advisory role rather than as a voting committee member to retain independence from fiduciary decision making. In our experience, this is a good blueprint for a typical corporate plan.
Committee inclusion ranges more widely for our tax-exempt-plan clients. For instance, higher education plan sponsors often prefer faculty, staff, and internal endowment representation in addition to finance, human resources, and operations.
Once the departments that will be represented are determined, the next step entails selecting people from appropriate positions within these departments. This is where we see the most variety across our client base. Finance and treasury representatives range from assistant controllers to treasurers to chief financial officers. Human resources may tap global compensation and benefits directors, plan managers, or even global heads of human resources.
Ultimately, the committee, along with outside advisors, should be a group of individuals who collectively have the skills and experience to meet ERISA’s prudent expert standard of care. While we can’t determine who the right people are for your specific plan, we can share some observations of what you’re looking for:
- A committee should empower its members to question decisions and voice their opinions as fiduciaries through their own professional perspectives. No single person can dominate the discussion or drive all committee decisions if the committee is to work effectively. For these reasons, we typically see company presidents and chief executive officers left out of plan committees.
- The best committee members are those who focus on committee meetings and can dedicate the time they need to fulfill their fiduciary duties. Committee members who miss meetings, arrive late, or leave meetings early, are a distraction and are typically not helpful. A commitment to consistent and timely attendance helps committee efficiency by reducing the need to bring people up to date or work around difficult schedules.
- Not only must committee members be present, but they must also be engaged and attentive. Coming to the quarterly plan review only to respond to emails or read other documents doesn’t add to a committee’s effectiveness.
The “Whys” Have It
Why do we have a committee? Why am I on the committee? Why do we have to meet every quarter?
For committee members to contribute fully and function as a group, they must understand the “whys.” To address this issue, CAPTRUST provides fiduciary training to clients to help committee members understand the roles, responsibilities, and personal and professional risks of retirement plan fiduciaries. We have found that fiduciary training can accelerate committee members’ learning and help them achieve a common understanding of their purpose. By undergoing fiduciary training together, they emerge with a better understanding of their individual responsibilities and the duties of the committee as the fiduciary governing body for the plan.
My colleague Phyllis Klein oversees CAPTRUST’s fiduciary training curriculum. She has been working with fiduciary committees for more than 20 years. She recently commented to me that “one of the best outcomes of fiduciary training is a level setting of objectives. I’ve seen committees representing complex organizations facing difficult and often disruptive decisions simplify the path forward, just through the common perspective they gain from a 90-minute fiduciary training session.”
The Rubber Meets the Road
Once you have formed a committee of informed and aligned professionals, the next challenge is to implement plan governance by this committee. Running a meeting for a committee comprised of veteran company leadership and strong personalities is an art in and of itself. To improve your odds of success, we suggest the following best practices:
1. Schedule meetings on a regular interval and well in advance.
2. Work from an agenda that is sent to members before the meeting.
3. Create an agenda that includes, at a minimum, the following items:
- Approval of prior meeting’s minutes
- Follow up on outstanding items from prior meetings
- Review of investments
- New business
4. Respect committee members’ time and attention
- Schedule adequate time for discussion and stick to the agenda.
- Distribute meeting materials to committee members in advance.
- Determine committee member preferences, including how they want to receive materials (e.g., electronic or hard copy).
5. Determine how decisions will be made and document your approach. For instance:
- Are decisions made by consensus—or by majority vote?
- Do all votes count the same?
Documentation is Critical
Meeting minutes are the most effective way to document meetings. A review of plan-related court cases reveals that what is captured in meeting minutes is effectively the only thing that happened in the meeting as far as the legal system is concerned. Maintaining continuity between meetings so that items marked for follow up in a previous meeting do not go unresolved is critical to ensuring appropriate action forward.
Any documents created or analyses performed and discussed in a committee meeting should be referenced in the minutes and retained in a fiduciary file. Examples of additional items that should be logged and retained include:
- Investment reviews illustrating investment performance relative to the plan’s IPS,
- Investment comparisons or studies prepared to address specific issues such as default investment selection or a stable value provider review,
- Investment, recordkeeper, and advisor fee benchmark reports, and
- Documentation of the committee’s periodic review of the plan’s IPS.
My role allows me to work with a broad range of plan sponsors to address their combustible issues. At times, that can be a little overwhelming—given the variation we see from client to client, industry to industry, and across plan asset size and complexity. Thankfully, despite the individual differences, common themes and best practices emerge. We find that a few straightforward practices exercised over time can make a world of difference. That is certainly true for fiduciary processes related to committee formation and plan governance.