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Using Behavioral Finance to Drive Retirement Outcomes, Part 4

Using Behavioral Finance to Drive Retirement Outcomes, Part 3

Using Behavioral Finance to Drive Retirement Outcomes, Part 2

Using Behavioral Finance to Drive Retirement Outcomes, Part 1

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Developing a High-Performance Retirement Plan Committee

Joshua P. Itzoe, CFP®, AIF®

A well-organized and effective retirement plan committee is the cornerstone of successful fiduciary decision-making and organizational risk management for plans of any size. However, great committees do not happen by accident—they are the product of a “best practices” approach to design and implementation. Listed below are eight simple steps any company can implement to make its committee more effective.

  1. Choose the right number of members

The most effective committees typically have between three and seven members. Too few members limit diversity of thought and the ability to achieve a quorum. Too many members can lead to ineffectiveness because it is difficult to gain consensus with “too many cooks in the kitchen.” Contrary to popular opinion, members do not need to be investment or retirement plan experts, but they should be committed to the task, engaged in the process, and have a reputation for making good decisions.  Typically, finance and HR are represented on the committee and a member from legal may be included, depending on the size of the organization.

  1. Appoint a Chairman and a Secretary

Strong committees have strong leadership. The Chairman’s job is to ensure the committee meets on a regular basis and to facilitate those meetings. The Secretary’s job is to ensure all relevant information is distributed to members and that committee business is documented (e.g., meeting minutes.)

  1. Utilize a Committee Charter and Committee Roster

Many committees suffer from a misunderstanding of the group’s roles and responsibilities. A committee charter is a short document that serves as a “mission statement” for the committee and clearly outlines what the group is accountable for and identifies procedures for removing or replacing members. Each person on the committee should sign this document in the “committee roster” section that is attached as an appendix.

  1. Provide formal fiduciary training

One of the primary weaknesses of most committees is that members are not fully educated on their fiduciary duties and are, therefore, ill-equipped to serve in an effective manner. Courts have made it clear that appointed fiduciaries must understand their responsibilities and be equipped to serve. Fiduciary training should be conducted for new members and reviewed annually. Key areas to cover should include the definition of a fiduciary under ERISA, the basic duties and responsibilities that are required, fiduciary best practices, investment considerations and prudent process, and provide an overview of current legal and regulatory trends. Since fiduciary expertise is generally not an in-house resource it is typically best provided by a knowledgeable third-party expert.  At Greenspring Advisors, we created Fiduciary U™ which is a web-based fiduciary training curriculum developed in consultation with Fred Reish from Drinker Biddle, one of the country’s leading ERISA attorneys.

  1. Meet 2 to 4 times per year (but no less than annually)

Formal meetings should occur on a regular basis and should not take more than 1-2 hours if well organized.  This, of course, depends upon what needs to be covered. For instance, certain topics may not need to involve the entire committee and can be handled offline by 1-2 key members with an update being provided to remaining members. Using an “accountability calendar” to break up and map out the key deliverables to cover throughout the year (e.g., annual fee assessment, investment monitoring, plan benchmark, bonding review, etc.) is a great way to organize your efforts and ensure all bases are being covered in the most efficient way possible. Also, it is usually a good idea to schedule meetings at the beginning of the year and get the dates on each person’s calendar, or meetings tend not to happen.

  1. Keep meeting minutes

One of the simplest ways to demonstrate sound decision-making is to keep diligent minutes of each committee meeting. Though simple in theory, studies have shown that the majority of plan sponsors fail to do so consistently. Effective minutes should identify which members were present, what information was reviewed and discussed, any decisions that were made and the resulting actions to be accomplished along with a timeframe and the parties responsible. As an order of business, minutes from the previous meeting should be reviewed to ensure any outstanding items have been completed.

  1. Maintain a “fiduciary file”

The key to minimizing fiduciary liability is to demonstrate “prudent process.” Creating and maintaining a fiduciary file is a critical step to being a well-organized plan fiduciary and/or committee. It serves as the central location for all plan-related information, takes the guesswork out of managing the plan, and helps ensure you are documenting all processes and meeting ERISA standards. While hard copies of information are sufficient, leveraging technology to manage the fiduciary process can yield significant benefits for committees in terms of time management and consistency of execution.

  1. Purchase fiduciary liability insurance

Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries can be held personally liable for losses to a retirement plan incurred as a result of their alleged errors or omissions or breach of their fiduciary duties. Fiduciary liability insurance helps protect against fiduciary-related claims of mismanagement of a company’s employee benefit plans.  While not required by the Employee Retirement Income Security Act (ERISA), and not a substitute for a sound fiduciary process, it can help cover the legal expenses of defending against breach of fiduciary duty claims, as well as the financial losses the plan may have incurred due to errors, omissions, or breach of fiduciary duty.

Investing the time to effectively organize a retirement plan committee and equip members is not simply smart in terms of managing risk but also in promoting the management of a successful plan. Over time, implementing these best practices should enhance the consistency and quality of decision-making, drive successful outcomes, and increase the probability that plan participants will retire with sufficient benefits. If your retirement committee needs a makeover or you need to create one for the first time we would love to help.