Two Things Your Employee Benefit Plan Cannot Live WithoutNovember 16, 2013
Jessie T. Kanter, CPA
It is not uncommon in the retirement plan marketplace for plan sponsors to place the responsibility of investment selection on the participants in the plan. However, the fiduciary responsibility remains with the plan sponsor, who is charged with oversight over the plan. The Employee Retirement Income Security Act of 1974 (ERISA) was designed to protect participants, not the plan administrator or the plan sponsor. Under ERISA, plan sponsors are responsible for providing participants with appropriate investment options in order for them to diversify their holdings and manage investment risk. There are two very important aspects of plan management that should to be in place in order to demonstrate fiduciary responsibility related to the investment options within a retirement plan.
Retirement Plan Committee
First is the establishment of a retirement plan committee. The members of the plan’s retirement plan committee do not need to be investment experts; however, they need to be committed to working in the best interest of the plan participants regarding the operations and the investment options of the plan.
Best Practices Include:
- Conduct regular meetings (at least annually); include investment advisors or consultants hired by the plan.
- Formalize, through a written charter, the duties and responsibilities of the retirement plan committee.
- Consider engaging independent investment advisors to assist in evaluating and benchmarking plan investments and fees.
- Establish procedures for proper oversight of the plan’s third party administrator and investment advisor, if applicable. It is important to note that the plan fiduciaries have responsibility for any outsourced plan activities.
- Review the plan’s investment policy statement at each meeting to ensure it remains relevant and current.
- Review investment reports in detail prior to retirement plan committee meetings in order to conduct effective meetings and have meaningful conversations.
- Document all retirement plan committee meetings. This should include the date, who was in attendance, the topics of discussion and conclusions reached.
- Maintain an audit file. This includes all plan documents, minutes of retirement plan committee meetings, agreements and contracts with service providers, investment reports, investment policy statement, RFPs for services and any other documents related to the plan.
Investment Policy Statement
Having a formal investment policy statement is equally as important as establishing a retirement plan committee. An investment policy statement formalizes the plan’s investment methodology, documents long term goals and objectives and establishes a framework for hiring investment managers and advisors and monitoring performance. It is essentially a roadmap for the retirement plan committee.
The investment policy statement should contain the following information:
- The type of plan, date of adoption and number of employees covered;
- Asset allocation policy;
- Definition of risk and the plan’s toleration for risk;
- Set rate of return for benchmarks;
- How investment decisions are made and how money managers and advisors are hired;
- How portfolio performance is monitored and how money managers are supervised; and
- The investment objective in order to meet funding objectives for defined benefit plans.
The overall objective of establishing a retirement plan committee and an investment policy statement is to reduce the plan sponsor’s fiduciary risk. By choosing the right committee members, conducting effective committee meetings and establishing a clear investment policy, the plan sponsor will be able to demonstrate its compliance with ERISA and Department of Labor and Internal Revenue Service rules and regulations related to its fiduciary responsibility.