This memo is intended to provide basic guidance on these issues, but is not intended to provide legal advice as to any particular matter. Of course, we would be happy provide advice with respect to the issues discussed below.
Why is there so much concern about fiduciary duties under ERISA?
The Employee Retirement Income Security Act of 1974 (“ERISA”) imposes a very high standard of conduct on the persons responsible for administering retirement plans. Failure to meet those obligations can result in personal liability for those individuals who act as a plan fiduciary, including, in some cases, attachment of their own plan account balances. The number of ERISA class action claims has risen over the past several years and plaintiffs have won both court awards and settlements, which may fuel even more litigation.
What can be done to help mitigate these risks?
Companies can take several actions to reduce or mitigate the risks related to offering any type of employee benefit plan, such as:
Educating plan fiduciaries about their duties and obligations;
Purchasing, and maintaining in force, a comprehensive fiduciary insurance policy;
Incorporating appropriate indemnities and other language into plan documents;
Creating and following written policies, procedures and internal controls;
Consulting with professional and competent plan advisors and carefully and prudently negotiating their compensation and terms of service;
Appointing (and regularly monitoring) designated plan fiduciaries, which can be either a committee or a professional plan fiduciary, or both, to act pursuant to a written agreement or delegation of authority, as provided under ERISA; and
Documenting the prudent processes that were followed by keeping minutes and records of actions taken, and, most importantly, the process that led to the making of the decision.
What is a retirement plan committee?
The purpose of having one or more retirement plan committees is to help ensure that the fiduciary responsibilities under the plan are properly and prudently fulfilled by a named fiduciary and that all named fiduciaries understand their role and the processes for fulfilling their duties under ERISA. This also helps to isolate personal liability to those persons who have been formally designated as plan fiduciaries.
Some larger plans have multiple committees to handle different functions, e.g., a plan administrative committee to handle functions such as benefit determinations, filing the required Form 5500, resolving ambiguities in the plan document, etc. and a separate plan investment committee to create an investment policy and handle plan investment decisions.
“Settlor” functions, such as plan design, plan amendment, plan termination are not subject to the fiduciary requirements under ERISA. These non-fiduciary functions are often reserved to the plan sponsor’s governing board or board executive committee.
Why create a committee charter?
Most plan documents are either silent or vague with respect to the actual functioning of the plan committee. The purpose of creating a written committee charter is to provide to the committee a governing document that explains the committee’s purpose and responsibilities and sets out the scope of its duties, the methods for appointing and removing committee members and the procedures and rules by which the committee is required to function. They are similar in many ways to the bylaws that govern boards of directors in corporations.
The committee charter generally empowers the Board to control the appointment and termination of committee members. It also typically requires the committee to maintain written records of its proceedings and to report to the Board each year in writing so that the Board can demonstrate that it has fulfilled its duty to monitor the actions of its appointees. This also helps to isolate and mitigate any personal liability of persons, such as board members, who are not involved in the day to day running of the Plan, but often named as defendants in lawsuits.
What is involved in creating and maintaining a committee charter?
To create a well-crafted committee charter, several actions are needed and the committee charter must coordinate with a number of other documents:
1. Review other relevant documents, including but limited to:
Investment policy statement, if any;
Recordkeeping/other service agreements; and
Governing documents for board of directors/managing members/partners.
2. Discuss and decide on structure of committee and other design features:
Composition of committee;
Procedures for appointment/removal/resignation;
Delegation and division of duties and obligations;
3. Draft, review and comment, put in final form, have appropriate fiduciary adopt the charter.
4. Circulate the charter to committee members.
5. Document the agreement and acceptance of the charter by committee members.
6. File the charter with plan records.
7. Review the charter from time to time to be sure it is followed and kept current and up to date.
Where can I get more information about ERISA’s fiduciary duties?
We regularly provide advice to plan sponsors and fiduciaries and would be happy to provide advice. In addition, a wealth of information may be found on the United States’ Department of Labor’s website. See, e.g., http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html.