October 9, 2023
Plan Sponsors Should Focus on Plan Governance and Plan Outcomes
As a plan sponsor and fiduciary, it is important to periodically review and evaluate your retirement plan, with the key focus of the review on two main areas: plan governance and plan outcomes. Offering a high-quality qualified retirement plan, especially in a tight labor market, helps attract and retain talent. Ignoring fiduciary responsibilities may lead to penalties from the Internal Revenue Service (IRS) or Department of Labor (DOL), employee lawsuits, and/or losing the tax qualification of the plan. And failure to act or improper action can result in fiduciary breach lawsuits and harsher treatment on a plan audit. The Employee Retirement Income Security Act (ERISA) requires fiduciaries to act prudently, but it does not require specific results. Thus, the good news is that a solid governance process helps protect fiduciaries from liability. However, the protection could be lost if processes are not followed, errors are not corrected and documentation is not kept.
Plan governance is the administrative oversight that assists in ensuring management of an effective and compliant employee benefit plan. It provides the structure, authority and processes for implementing and operating benefit plans. Good plan governance is a combination of many elements. The governance structure should have clearly defined roles and responsibilities for the administration of the retirement plan and management of the plan investments. The individuals assigned to these roles need to understand what they are accountable for to be effective in their roles. Operationally, internal controls should be established to ensure plan processes are complete and accurate. In addition, strategies need to be in place to mitigate risk such as establishing standards for frequency of plan reviews of administration and investments as well as protection of access to participant data.
To begin, a plan sponsor should review and understand the plan and related documents to ensure awareness of how the plan is designed to operate and to ensure proper procedures and responsibilities are established for plan administration. At times, a company may look to hire a third-party administrator of recordkeeping to assist with the plan administration and to provide expertise. Along with assigning roles, there should be clear designation of authorized signers, such as a primary signer for all plan document records and documentation of who is authorized to approve participant forms and hardship distributions.
Further as a fiduciary, the employer’s duty to act prudently is evidenced by having processes in place for making fiduciary decisions in relation to mutual funds offered in the plan and the documentation of those decisions. A fiduciary must act solely in the interest of the participants and beneficiaries, so if there is not a person familiar and skilled with carrying out the duty of investment selection within the company, then it would be best to hire an 3(38) investment manager to perform this function. The plan menu of investments should be diverse, yet not overwhelming with too many investment options. The selection of the qualified default investment alternative (QDIA) is important as many participants are not actively engaged and default to this investment. An investment line-up that contains both passively- and actively-managed funds provides further diversification and optionality for participants. Other common investment options within a well-constructed plan include model portfolios, target date solutions, and a cash option.
A retirement plan governance committee should be established to ensure meetings are held to review the overall retirement plan from a fiduciary and compliance perspective. These reviews typically cover topics such as a high-level financial summary, investment review, employee participation and education offerings, fee review, regulatory changes, and employer level system access along with report delivery. The meeting agenda and potentially any written meeting notes are frequently requested by plan auditors as documentation of plan governance. Plan sponsors should also establish a process to routinely monitor administrative duties at regular intervals and document that review. Documentation demonstrates a culture of compliance. If an error is noted, the plan sponsor should work promptly to correct the error and make the necessary adjustments to avoid similar errors in the future.
Good plan governance leads to good plan outcomes, which is evidenced through successfully passing an independent auditor review and a low occurrence of administrative errors needing correction. Further, a good measure of a successful retirement plan is increased employee participation and deferral rates through continual offering of participant education and participant help center support. Providing a menu design of “best in class” mutual funds with reasonable costs/fees provides an investment line-up with the goal of greater performance returns relative to their peer investments, which in turn grows the participant retirement saving accounts.
Although an employer may never completely absolve themselves of fiduciary responsibilities, Greenleaf Trust partners with clients to assist with plan administration and fulfilling their fiduciary responsibilities with the mutual focus of good plan outcomes.