Good housekeeping is an essential part of good plan governance. If a plan sponsor’s documents and governance structure were in a metaphorical closet, a closer peek inside might reveal that what plan sponsors are (or are not) doing could be putting their companies at risk.
The standards of fiduciary conduct for retirement and welfare plans are generally set forth in the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA distinguishes between a plan’s fiduciary functions, which are subject to ERISA, and settlor functions, which are not. Fiduciary functions include exercising discretionary authority with respect to a plan’s management or administration, whereas settlor functions relate to a plan’s design, amendment, and termination. Although a person is allowed to wear “two hats” with respect to a plan (serving in both a settlor and fiduciary capacity), ERISA requires that these overlapping roles be kept separate and distinct.
With this in mind, we recommend these good housekeeping actions to streamline plan administration and minimize exposure to breach of fiduciary duty claims and potential litigation:
- Clearly and consistently designate fiduciary and nonfiduciary duties in plans and related documents, such as summary plan descriptions, trust agreements, investment policy statements, and committee charters.
- Consider establishing separate committees for plan design (settlor), plan administration (fiduciary), and plan investments (fiduciary), and ensure that each committee has a written charter approved by the board of directors.
- To avoid overlapping duties, which may lead to multiple claims of breach against numerous parties, ensure that one entity is responsible for each specified duty. Review delegations of authority and committee appointments at least annually.
- To shield plan fiduciaries from liability, specify as many directives as possible in a plan document as part of plan design (e.g., the title of committee members, specific investment options and guidelines, etc.).
- Preserve attorney-client privilege by ensuring that in-house counsel does not serve on a committee that will serve as a plan fiduciary and that legal advisers distinguish between providing advice to the plan sponsor versus the plan fiduciary.
- To mitigate conflicts of interest, if a plan includes employer stock in its investment lineup, avoid including senior executives with inside information about the employer on the plan investment committee.
- Consider appointing an independent fiduciary to take responsibility of any employer stock fund included as an investment alternative.
Like any good housekeeping activity, periodic review and maintenance is key to ensuring that a plan sponsor’s fiduciary duty under ERISA is met. If your plan design or plan committees have undergone changes, or if it has simply been a while since you last reviewed your plan’s governance structure and documentation, now is the time to check if there are any skeletons lurking in your plan’s closet.