It is not hyperbole to suggest that you as a retirement plan sponsor must take seriously your fiduciary responsibility. This includes plan governance, such as a review of the risks that threaten the plan’s compliance with ERISA requirements, an analysis of portfolio performance vis-à-vis benchmarks and peers, and a determination of whether plan participants will have the resources necessary to meet their expected retirement income needs.
It is not wholly unexpected for plan sponsors to be challenged by their duties when it comes to plan governance. With all the responsibilities before your company to remain profitable and expand market presence, an administrative task of this nature can be seen as a low priority. This type of mentality can be detrimental for you as a plan sponsor, particularly in the wake of increasing legal liability and plan inefficiencies that raises the cost of your plan and reduces the plan’s expected return.
Defining Plan Governance
Plan governance is the framework that assists in effective decision-making over the retirement plan, from plan documents and operations to investments and financial reporting. A proper plan governance procedure provides structure and authority over the processes and policies for managing the retirement plan, along with the roles and responsibilities of the plan administration team.
Benefits of Having a Plan Governance Procedure
Plan governance is an important part of a plan sponsor’s fiduciary responsibility under ERISA. Not only is it necessary to ensure compliance, it is good practice for the sponsor and other fiduciaries involved with the plan. It provides peace of mind for participants in addition to identifying deficiencies (or gaps) that can be immediately addressed before they can significantly impact a plan’s results.
A strong governance process benefits the sponsor, the participants, and meets many of the items on the fiduciary checklist. It lowers the risk of potential liabilities that come with a breach of fiduciary responsibility, which could lead to penalties and fines being imposed, as well as expensive and lengthy lawsuits. It reduces the risk potential that a plan is disqualified by the DOL or IRS and lowers potential operating expenses. Moreover, a well-structured plan governance procedure is likely to result in:
- fewer administrative headaches,
- improved financial controls,
- and streamlined plan decision-making.
Developing an Effective Plan Governance Procedure
We review what steps to take to develop an effective plan governance procedure.
Identify Fiduciaries & Plan Service Providers
Proper identification and documentation of the plan’s fiduciaries is the first step for proper governance. It’s important to identify all members, including individuals, committees, and plan service providers. Document each role and their responsibilities. More importantly, any and all members involved in the plan oversight should provide formal acknowledgement of their roles and responsibilities.
Fiduciary training
Once the list of fiduciaries has been established and documented, it is important that training be provided. This training focuses on those specific responsibilities and duties under ERISA that must be observed to maintain compliance. The training, beyond a discussion of basic rules, should also provide information on how one becomes a fiduciary (which is more a function of activity/action than title). The fiduciary training should stress the risks and liabilities incurred when acting as a fiduciary unintentionally. Trainings should be conducted on a regular basis, or if there are any new members or there are changes in responsibilities.
Document Amendment/Termination Process
If your plan document, committee charter and investment policy statement do not sufficiently assign areas of responsibility, particularly in the areas of investment management and oversight and a determination that fees being charged are reasonable, it may have fallen out of compliance with requirements under ERISA. This will include the filing of certain 5000 series forms with the IRS, notification of benefits, termination and rollover notices to affected participants. Here is where the services of an outside consultant experienced in plan governance review becomes important and vital.
Plan documents should include key provisions, such as eligibility, contribution limits and distributions. Any changes pertaining to the operations of your plan, it is crucial to update the plan document accordingly.
Other Important Considerations
Beyond the main steps that are required to improve your retirement plan governance, there are some additional aspects of plan administration that need to be addressed. These areas are critical in providing a check on investment performance and ensuring that plan participants are kept up-to-date of any and all important (and in many cases required) notifications.
These additional steps include:
- Investment Management and Monitoring – plan governance must address the process required to manage investment performance and assign monitoring tasks to ensure that performance matches expectations. An Investment Policy Statement is not required, but it is highly recommended.
- Compliance Monitoring – plan governance must assign the task of monitoring the operation of the plan in accordance with applicable laws. Relevant to identifying plan fiduciaries, there should be documentation related to who are responsible for coordinating compliance monitoring activities.
- Participant Communication – a communications plan should be incorporated in plan governance. Plan sponsors are required to provide a number of basic disclosures to participants. It should be noted what notifications and disclosures are required and when it needs to be communicated.
- Annual Plan Review and Reporting – a process for reviewing the plan and complete required forms (I.e. Form 5500) must be addressed as part of overall plan governance.
Work With a Registered Investment Adviser
Plan governance is importance, necessary, and a required undertaking. It may be the type of undertaking that is best handed off to a retirement plan consultant that can help develop a process that ensures that it receives the attention it deserves and allows you to focus on other critical areas within the company. As an independent Registered Investment Advisor, PlanPILOT is not tied to any investment fund or record-keeper. We offer clients unbiased advice and assistance to control their retirement plan risks and deliver benefits effectively. Contact us at (312) 973-4911 or info@planpilot.com.
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