Plan Committees Need a Microscope and a Periscope

Plan Committees Need a Microscope and a Periscope

October 2015


Plan committees need a microscope to closely examine the issues on their agendas. However, committees also need a periscope to scan the horizon to see the issues that should be looked at, but aren’t on the agenda.

It is not enough to just go through the agenda of basic responsibilities. Instead, committees also need to make sure that their agendas cover all of the matters that they are responsible for, including emerging issues. In that sense, fiduciaries have a “micro” job of looking closely at each issue — and they need a microscope for that; and committees have a “macro” job of ensuring that they are considering all of the issues that matter.

If committees have a good periscope, which can be helped by an expert consultant and a knowledgeable attorney, they will identify the important issues and develop an agenda that, over the course of the year, covers those items. Then, the agenda becomes a roadmap for compliance.

This article includes a discussion of how a plan committee should act to fulfill its fiduciary duties and a checklist of agenda items for a participant-directed plan. Those agenda items are allocated over four quarterly meetings. (In my experience, most committees meet on a quarterly basis and, therefore, the agenda checklist was developed that way.)

Unfortunately, though, no sample agenda can cover every topic that every committee should consider. So, treat the checklist as a starting point, and then customize it to your plan and its issues.

An Overview of Fiduciary Advice

When committees serve as the primary fiduciaries for participant-directed plans, their responsibilities typically fall into two categories: (i) the prudent selection and monitoring of investments and (ii) the prudent selection and monitoring of the plan’s service providers.

Both sets of responsibilities require that a committee engage in a prudent process to consider quality, cost and results. (In a sense, “results” is a component of “quality,” since high-quality investments or services should produce positive results.)

The best way to explain a prudent process for making a decision is to start with the end — the outcome of that process. A prudent process always produces an informed and reasoned decision. “Informed” means that the committee obtained and reviewed the information that a knowledgeable person would want in order to make a thoughtful decision. That information can be reviewed by committee members, or it could be reviewed by a consultant or by knowledgeable staff, who reports to the committee, or by a combination of the two. But, one way or another, the committee needs to consider the information that is relevant to making an informed decision. That’s how the committee uses the microscope.

“Reasoned” means that the committee has to make a reasonable decision based on the information it reviewed and the advice that it received from its consultants and attorneys. In other words, the decision cannot be arbitrary or capricious. There has to be a rational connection to the information that was reviewed.

However, the bigger risk may be that a committee had a responsibility to make a decision, but the members weren’t aware of that responsibility… and, therefore, never engaged in a process to become informed and to make a reasoned decision. That risk is partially attributable to the evolving nature of participant-directed plans. For example, revenue sharing in 401(k) plans became an issue just a few years ago. But, now, plan committees are expected to understand and evaluate revenue sharing, as well as to consider it in reviewing the compensation of their service providers. Similarly, some committees have not considered whether they have the right share classes of the mutual funds in their plans. But, the decision of Tibble v. Edison International1 concluded that fiduciaries must take into account a plan’s purchasing power and select the share classes of mutual funds that are appropriate for that plan.

A relatively new issue — but one that is significant — is a committee’s fiduciary responsibility to know and evaluate the communications by the plan’s recordkeeper with participants about distributions and rollovers. Governmental regulations are increasingly concerned that participants are not being given clear, complete and unbiased information about their alternatives when they leave their plan.2 The regulators are concerned that providers may be steering participants into expensive and/or proprietary products that financially benefit the providers, but at the expense of the participants. As a result, committees need to know what is being said to their participants and ensure that the providers are conveying accurate and complete information to participants.

Those are just three examples, but they illustrate why a committee needs a periscope.

Since most committee members do not spend most of their time in the 401(k) marketplace, they should regularly ask their investment consultants and ERISA attorneys to describe new and emerging issues… or even old issues that they may not have addressed. To help with that job, the following checklist covers some of the emerging issues for committees, as well as most of the old ones.

Committee Agendas

With those responsibilities in mind, here is the roadmap for compliance through a well-constructed set of committee agendas:

1Q The first quarterly meeting of the year

Ordinarily, the purpose of this meeting would primarily be to review the prior year and to make decisions based on events that have occurred during the prior year and the prior quarter.

Review of minutes of last quarterly meeting of committee and reports on “action items.”

Committee minutes usually cover “action items” and “information items.” An information item is one which educates the committee, but does not require a decision. For example, it could be a report about the performance of the stock market. An action item is one which requires a decision. An obvious example is the repeated underperformance of an investment and a recommendation by the plan’s consultant that the investment be removed and replaced. Some action items require follow-up. For example, if one of a plan’s investments is placed on the “watch list” at a meeting, there needs to be reports at subsequent meetings about the investigation into that investment. And, at some point, there needs to be a decision to either remove the investment from the plan or to take it off the watch list.

Quarterly and annual investment review.

Most committees are familiar with their responsibilities for monitoring their plan’s investments. And, in my experience, most committees, working with their investment consultants, do a good job. I am concerned, though, that committee members may not understand the concept of a “watch list.” When an investment is placed on a watch list, it just means that the committee members have decided, for one reason or another, to more closely investigate the investment. In other words, the investment is being “watched.” But, that means that someone — a committee member or the investment consultant — is doing an investigation, perhaps talking to the investment manager or looking into the reason for the underperformance. The results of that investigation should be reported at each meeting, when the investments are discussed. (By the way, a watch list is not a legal concept. Instead, it is a label used by the investment industry.)

Annual review of service provider operations and issues.

Plan committees have a responsibility for overseeing the operations of their service providers. The first meeting of each year is a good time to review those operations in terms of quality and adequacy. For example, is the service provider doing a good job for the company and are they performing the services that are needed for the plan? A good approach would be to have someone from the human resources or benefits staff report on the services of the recordkeeper during the preceding year.

Annual review of investment policy statement (IPS).

Unfortunately, some plan committees don’t periodically review their IPS and, as a result, they may make decisions that are inconsistent with it. To avoid that problem, the committee should go through the IPS once a year, just to re-familiarize themselves with its provisions. Keep in mind that the IPS is “owned” by the committee. If it says something that is no longer appropriate, or that could be improved, the committee should amend the document.

Annual report to Board of Directors.

Plan committees are usually appointed by the Board of Directors of the company. Or, even if they aren’t formerly appointed by the Board, the responsibility for the prudent selection and monitoring of committee members usually belongs to the Board of Directors (or, perhaps, to the Board’s compensation committee).

Committees can help the Board of Directors satisfy their fiduciary duty to prudently monitor the operation of the committee by providing an annual report to the Board. The report does not need to be a detailed discussion of the operations of the committee. Instead, it should provide enough information to enable the Board to determine that the committee has operated in a manner that fulfilled its responsibilities for the preceding year. For example, a committee might provide the Board with the minutes of the committee meetings and of the agendas for those meetings, but the committee would not need to provide the Board with the reports from the investment consultant. It’s not the Board’s job to second-guess the investment decisions; instead, the Board should be aware that there is an investment consultant who helps the committee competently fulfill its obligations.

Other matters.

This category is just a placeholder for issues that may have come up since the preceding meeting. The agenda should be flexible.

2Q Quarterly meeting

Review of minutes of last quarterly meeting of committee and reports on “action items.”

Quarterly investment review.

Review of participant-related issues.

  • Participation.
  • Deferrals.
  • Participant investing.
  • Retirement readiness.

Committees do not have a fiduciary responsibility to ensure that individual participants are ready to retire with adequate benefits, or that they are investing well, deferring enough or even participating in the plan. However, there are obvious benefits for a committee to focus on those issues, such as facilitating the accumulation of adequate benefits so that older participants can retire — if they want to retire. Also, a review of these matters may indicate issues in areas that the committee is responsible for. For example, low participation or inappropriate investing patterns may indicate that the plan’s education programs and communication materials are not well done.

As a result, committees should consider benchmarking the performance of their plan against the plans of their competitors (that is, other similarly situated companies). That could provide the committee with the information it needs to better direct the efforts of its service providers or, for a larger company, its benefits staff.

Review of participant disclosures and notices.

Plan committees have the responsibility for overseeing the delivery of legally required participant information and disclosure materials. That ranges from summary plan descriptions to investment information. A committee member, or perhaps someone on the benefits staff, should review those materials and report to the plan committee. The oversight of those materials is a fiduciary responsibility, and the committee needs to have a basis for knowing that they are fulfilling their responsibilities. However, not every committee member needs to be an expert on those requirements.

Other matters.

This category is just a placeholder for issues that may have come up since the preceding meeting. The agenda should be flexible.

3Q Quarterly meeting

Review of minutes of last quarterly meeting of committee and reports on “action items.”

Quarterly investment review.

Report on legal changes, including issues of focus for IRS and DOL guidance and audits, and fiduciary litigation issues.

The committee should have its benefits attorney report on legal changes during the preceding year (and perhaps on anticipated legal developments). Every year seems to bring new court decisions, legislative changes, regulations and other guidance. Committees should keep abreast of those changes, with a focus on how the changes impact the committee’s responsibilities.

Report on industry trends.

Representatives from the investment consultant and recordkeeper should report to the committee about industry trends. In particular, the report should focus on new developments. As a part of that report, the committee members should be asking whether they should be considering those new developments for their plan. Keep in mind that, in the not-too-distant past, target date funds and automatic-enrollment were new developments. An example of a new trend (and of a legal development) is the projection of retirement income. Some plans are providing their participants with projections of the retirement income that will be provided by their account balances and future deferrals. In some cases, those plans are also providing benchmarks for retirement readiness for a typical participant and estimates of the deferral levels that would be needed to reach that goal.

Review of plan design.

While it may not be necessary for the committee to review the design of its plan every year — and it isn’t the committee’s legal responsibility to look at the plan design, it is a good practice to occasionally step back and ask if the design is aligned with the company’s objectives. For example, in recent years many plan sponsors have added automatic-enrollment and automatic-deferral increases to their plan design. Some have also added Roth deferrals.

Review of plan policies, including QDRO and loan policies.

While committees are not responsible for the hands-on administration of participant activities, such as qualified domestic relations order (QDROs) or participant loans or hardship withdrawals, committee members are responsible for overseeing that those activities are being properly administered. As a result, it is helpful to have benefits staff and/or providers report to the committee each year about those operations. The report should include any changes that are being made to adapt to new requirements. For example, the IRS has recently announced requirements for documenting compliance with the legal criteria for participant loans and hardship withdrawals, and for retention of that documentation.

Review of participant issues and complaints.

From a risk management perspective, committees should have a procedure for handling participant concerns and complaints. Ordinarily, those issues are resolved at the staff level and committee members do not need to be involved. However, if the matter is not fully resolved at the staff level, it should be brought to the attention of the committee at the next meeting (or, depending on the seriousness of the issue, possibly before the next meeting).

Participant complaints are an “early warning” system for possible problems with plan operations. As a result, they are both threatening and valuable. They are valuable if the committee is aware of them and takes actions to respond appropriately. They are threatening if the committee is not informed of the issue.

Review of insurance and bonding.

Every plan needs to have an ERISA bond; it’s the committee’s responsibility to make sure a compliant bond is in place. Unfortunately, some committees aren’t aware of that duty. As a result, some plans aren’t bonded or, if they are, the bond doesn’t satisfy ERISA’s requirements.

While companies are not required to have fiduciary insurance, some do . . . to provide protection for plan committee members against possible claims.

Other matters.

This category is just a placeholder for issues that may have come up since the preceding meeting. The agenda should be flexible.

4Q Quarterly meeting

Review of minutes of last quarterly meeting of committee and reports on “action items.”

Quarterly investment review.

Review of costs and compensation for service providers and plan operation.

Committees are required to review the costs for plan services and determine that they are no more than reasonable. Committees must also review the “compensation” of service providers and determine that it is reasonable. (The difference between “cost” and “compensation” is that the latter includes payments from third parties. For example, a recordkeeper may receive payments from mutual funds in addition to its direct charges.) To evaluate costs and compensation, committees need to obtain market data,3 that is, financial information about the charges and compensation for similar services for similar plans.

Review of mutual fund share classes.

As a result of recent court decisions, plan committees need to know which mutual fund share classes they are using, why they have selected those share classes, and whether they appropriately reflect the plan’s “purchasing power.” Because of the importance of this issue, it’s a good practice to have the plan’s investment consultant prepare a written report about the share classes used by the plan (and the other share classes of the same mutual funds that might be available) and deliver that report to the plan committee with a recommendation to keep the same share classes or to make changes. The report should be attached to the minutes and retained in the plan committee’s due diligence file.

Report on revenue sharing.

Plan committees must decide whether to select mutual funds or other investments that pay revenue sharing. Typically, investments that pay revenue sharing are more expensive than those that don’t. However, it is legally permissible to select investments that pay revenue sharing and use the revenue sharing to pay for plan expenses. However, those decisions cannot be made without the committee examining specific information. For example, which investments pay revenue sharing? How much? How does that affect participants? What is the total dollar amount of revenue sharing paid to the recordkeeper and is that reasonable? Some plan committees have adopted fee and expense policy statements to help them address the revenue sharing issues for their plans.

Other matters.

This category is just a placeholder for issues that may have come up since the preceding meeting. The agenda should be flexible.

5 Unscheduled items

There are other issues that require a committee’s attention. However, not all matters need to be reviewed every year, and in other cases the issues are driven by events.

The following are examples of agenda items for those issues

  • Provider changes.
  • 404(c) compliance.
  • Required plan amendments.
  • Amendments to service provider agreements.
  • Fiduciary education

The purpose of this checklist is to help committee members and their consultants develop a roadmap to compliance. It should be changed or augmented to reflect the needs and circumstances for the plan and committee.



1 Tibble v. Edison Int’l, 729 F.3d 1110 (9th Cir. 2013) cert. granted in part, 135 S. Ct. 43, 189 L. Ed. 2d 895 (2014) and vacated, 135 S. Ct. 1823 (2015).

2See, e.g., GAO, 401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants, GAO 13-30 (Washington, D.C.: March 2013).

3Tussey v. ABB, Inc., 746 F.3d 327 (8th Cir. 2014) cert. denied, 135 S. Ct. 477, 190 L. Ed. 2d 358 (2014).

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. Contact your financial advisor to obtain a prospectus, or a summary prospectus, if available, that contains this and other information about a fund, and read it carefully before investing.

This information is general in nature and not intended to constitute tax or estate planning advice. Please consult your tax or estate planning advisor for more detailed information on these issues and advice on your specific situation.

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