Insights


Defined Contribution Retirement Plan Committee Composition: What Is Ideal?

Offering a competitive retirement plan is one of the most important benefits an organization can provide to its employees. However, given the complexity, required resources, and potential for liability related to operating a retirement plan, establishing a committee to share in the fiduciary responsibility and oversee the plan’s governance is considered best practice.

Most importantly, establishing a committee helps an organization ensure that a prudent process is being followed, particularly when it comes to decision-making, as mandated by the Employee Retirement Income Security Act (ERISA). With all parties on the same page, the retirement plan committee can work more efficiently and effectively to ensure that the plan operates in the best interest of the participants.

While the reasons for having a retirement plan committee may be clear, who should serve on the committee is not. With no guidance from ERISA, the Department of Labor (DOL) or state law (for public plans), organizations are often left questioning the best composition for their committee.

When determining who should serve on the retirement plan committee, plan sponsors typically gravitate to those who have specific expertise with the topic at hand. While committee members do not need to be experts in investments, having a basic knowledge of retirement plans and/or financial markets proves helpful. It is also important to include a range of individual perspectives. With varied backgrounds and experiences, the committee can work more effectively to design and operate a retirement plan benefit that serves the diverse needs of the organization’s employee population.

Existing Fiduciaries

First and foremost, individuals who already serve as fiduciaries to the plan (i.e., those who have discretion in administering and managing a plan and/or controlling the plan’s assets) should be a part of committee, as they are held legally responsible for the plan decisions, and thus, need to have a say in making them.

This serves as a good starting point for the retirement committee, as unnecessarily increasing the number of individuals who have fiduciary liability, and need to be insured accordingly, can be costly for organizations.

Senior-Level Staff

Typically, senior-level staff with particular expertise in running the plan also make obvious choices for the committee. For example, finance officials who work with the plan financials, human resource personnel who understand the organization’s employee population, and investment officers who work with the plan’s investments, all make strong additions to a committee.

It is important to remember, however, that the committee will be a “working” committee. Thus, only individuals who have the capacity to dedicate time to committee tasks should be selected. For this reason, CEOs, and others acting in a similar capacity, are typically not on the committee. Careful consideration should be given to other C-suite individuals to ensure that the committee, as a whole, can efficiently complete its work. Most committees meet on a quarterly basis, with occasional work between meetings.

Internal Resources

Plan participants, as the main beneficiaries, have an active stake in the retirement plan. Therefore, consideration should be given to include representation from groups of participants such as staff, union, faculty, and physicians. Additionally, organizations with multiple campuses should consider including representation from each location and/or group. Their unique perspective and ability to serve as a sounding board may be beneficial to the retirement plan committee. Plan participants are also generally more effective in terms of the core fiduciary tenet of acting in the best interest of plan participants.

One concern with including representation from participant groups is that the individuals may not want to assume the fiduciary responsibility required of committee members. An option in this scenario is to include these individuals as non-voting members, allowing them to stay appraised of potential changes and provide feedback, without the associated liability of being able to directly vote as a committee member.

External Stakeholders

While outside board members are permitted to serve on the committee, they may not be ideal candidates, as they may lack expertise in retirement plans. However, depending the board member’s background and the committee fit, the committee can be effective in its work, since things that would ultimately require board approval might be met with easier approval if the committee contains board members.

Other Considerations

For organizations with in-house counsel, consideration should be given as to whether to include them on the retirement committee, since including counsel can make it difficult to preserve attorney-client privilege. If not included as a formal member of the committee, counsel can still attend meetings to lend their expertise as a representative of the plan sponsor.

The ideal number of committee members will vary based upon the size and type of employer sponsoring the plan. Most committees have between three and nine members (an odd number of members is preferred for voting purposes). Too small of a group may lack appropriate expertise and representation, where too large of a group may hinder decision making.

Conclusion

Retirement plan committees serve an important function to ensure that the plan fiduciaries fulfill their responsibilities. Thoughtfully establishing a committee is the first step in a prudent fiduciary due diligence and risk management process. Once a retirement plan committee is established, a committee charter should be developed to outline the governance process of the committee and the roles and responsibilities of its members. We explore what a committee charter should include in this Top of Mind blog post.

In today’s dynamic and litigious retirement plan environment, plan sponsors should be continuously evaluating their approach to plan design and governance. Thus, having a highly effective retirement plan committee has never been more important.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

Investment products available through Cammack LaRhette Brokerage, Inc.
Investment advisory services available through Cammack LaRhette Advisors, LLC.
Both located at 100 William Street, Suite 215, Wellesley, MA 02481 | p 781-237-2291