As the sponsor of an employee retirement plan, you know that sponsoring such a plan helps you to be a competitive employer, supports your employees’ long-term financial goals, and provides various tax advantages. However, plan sponsors and other fiduciaries responsible for such plans must also understand that they need to enact and follow sound governance processes for overseeing and managing these plans.
As a plan sponsor, your company oversees the selection and monitoring of plan investments, compliance with legal and regulatory requirements, and the administration of plan benefits. In addition, you must ensure that you meet your fiduciary responsibilities. In short, you have a legal duty to manage plans prudently and align your plan’s assets, investments, and costs to the best interest of the plan’s participants and beneficiaries1. These duties include selecting and monitoring plan investments, operating in compliance with plan documents, meeting legal and regulatory requirements, and providing adequate funding for the plan.
Frequently, this oversight is done by a committee established by the plan sponsor. Such committees are routinely charged with:
- plan design
- investment selection and monitoring
- oversight of legal and regulatory compliance
- benefit administration
Effective governance over such functions often entails specialized skills that you may not have in-house. As a result, many companies work with third parties, including advisors, plan providers, third-party administrators (TPAs), auditors and other professional service providers in the performance of these functions.
While third-party administrators and other service providers to the Plan can give you guidance in these areas, and help to ease some of the administrative burden, you still retain ultimate accountability and fiduciary responsibility as the Plan sponsor.
Because plan sponsors retain this ultimate accountability, understanding your responsibilities is crucial, whether or not you discharge these responsibilities through a plan committee. In our experience, there are three common areas that routinely challenge plan sponsors: 1) building an effective committee, 2) handling fiduciary responsibilities, 3) managing service providers to the plan. Let’s spend a minute or two briefly reviewing a few aspects of each.
Building an effective committee
In our experience, Committee sizes and structures tend to depend on company size. That said, you should strive for representation from individuals in each of the following areas: HR, finance, and legal. These individuals may already have some familiarity with the operations of the benefit plan. Typically, they also complete training to understand the regulatory requirements around employer-sponsored plans. In addition, representation from within your employee base, including managers and staff, can help you to stay in touch with the needs and preferences of plan participants.
In addition, experienced partners and service providers play a vital role in supporting plan administration, compliance, reporting, and tax filing. External support is especially relevant for smaller companies, but even companies with several hundred employees may prefer to outsource some or many aspects, particularly those that require specialized expertise or experience. Engaging the right resources just makes sense, and can also help you focus on the things that you do best and that help with the critical “Four Rs" – recruiting, retaining, rewarding, and retiring the best employees.
Handling fiduciary responsibilities
Fiduciary responsibilities are often the most significant source of anxiety for Plan sponsors. Among these fiduciary responsibilities are the obligations (i) to act with prudence, loyalty, and impartiality when making decisions, (ii) to act in the participants’ best interests, and (iii) to disclose actual and potential conflicts of interest. Understanding these broad concepts alone is somewhat complex, but complying with the 521-page Employee Retirement Income Security Act (ERISA)1, which defines these requirements, is considerably more complex.
Moreover, the legal and financial risks of getting it wrong are high. Non-compliance exposes your company to fines, penalties, and tax withholding complexities. You also face the possibility of participant-level litigation if plan investments are not selected and managed in the best interest of participants.
For example, optimizing plan fees and costs takes investment experience. Employers typically do not have the time, technology, or data access to consider the most cost-effective share class or monitor investment performance on a regular basis. The dynamic nature of the investment market also means that the best choices change.
Managing service providers to the plan
Plan sponsors have mechanisms in place to help mitigate risks. In some cases, their plan provider can help them manage ERISA compliance by supplying benchmarking data and remaining competitive on pricing. TPAs can offer more in-depth support and even take on some risks contractually. Various types of TPAs can take on areas such as plan administration, investment decisions, or investment advice.2
When outsourcing, it is still the responsibility of the committee to review and document the service provider’s work and develop an effective oversight program to ensure that such service providers are fulfilling their duties, including selecting TPAs and other outsourced services.
Focusing on the “Four Rs”
Offering a retirement plan gives employers an opportunity to be more competitive in the labor market and to strengthen what they offer their employees. The goal of effective plan design is to achieve the Four Rs: Recruit, Retain, Reward, and Retire the best employees.
Achieving the Four Rs is a key area of focus for plan committees. Common factors include employee age, tenure, retention rates, compensation, and status as salaried or hourly. Employee populations who are older and who have low turnover rates will have different needs than younger and more mobile cohorts. However, the plan must treat all eligible employees fairly. These factors make up an essential consideration for plan design and updates.
Retirement plan committees must contend with a significant set of responsibilities and obligations. These obligations often occur on a regular calendar.2 Outsourcing to various service providers can be a cost-effective solution for managing risks, provided that you exercise effective oversight and understand that you ultimately retain the responsibility for assuring that such service providers perform their services in accordance with your requirements and expectations.
Plan sponsors have a lot to manage when administering a sound plan. Wilmington Trust Retirement Advisory Services professionals have the experience and industry knowledge to help. To experience the value a retirement plan advisor can add, as well as a complimentary 401(k) retirement plan consultation, connect with Wilmington Trust today.