The Value of a 401k Retirement Committee: Who’s On First?
by Ilene Ferenczy
Zach is the head of HR for a mid-sized company and is responsible for the 401(k) plan’s operations. The CEO told Zach that part of his responsibilities as HR director was to head up the 401(k) Committee, which also includes the CEO, the CFO, and the Benefits Manager. In real life, however, as 401(k) concerns arise, Zach either makes decisions by himself, or sends the problem up the line to the CFO or the CEO, who advises him how to proceed. “Why do we have a Committee if it never meets?” Zach asks. “Do we even need a Committee?”
The Buck Stops Here? Or Here?
The law requires all plans to have a Plan Administrator (PA), who is responsible for the plan’s administration. The PA is named in the plan document and is usually either the sponsoring company or a plan committee. The PA makes any discretionary decisions about plan operations (and, sometimes but not always, investments), interprets plan terms, and hires the other service providers for the plan. The PA is also responsible for providing notices to employees and filing annual forms with the Department of Labor. Because the PA is in charge of the plan, it is a fiduciary, responsible for acting in the plan’s best interest in a prudent fashion.
In small companies, the PA is commonly the business owner (who handles just about everything). But, a larger company needs a structure to identify who is authorized to make any necessary decisions about the plan. Sometimes, this is done through job assignments; for example, Zach, as HR director, was authorized as part of his job to handle any plan issues that arose. But, this may be problematic, because Zach has no idea where his responsibility and authority begin and end. That is dangerous: important deadlines can be missed and issues can be mishandled, creating liability for the employer that sponsors the plan.
Plan Governance… A Fancy Name for a Simple Thing
Well-managed plans have procedures clarifying the lines of authority and responsibility for those acting as PA. The company will delegate that duty to either a company official (such as Zach) or a group of people (such as a Committee). That delegation should be in writing so that everyone knows what decisions the delegate can make for the plan and who has the actual final authority. For example, in some companies, the Committee is fully authorized as the Plan Administrator, making all decisions. Other companies limit the Committee’s authority monetarily (e.g., they must obtain CEO approval for any expenditure or benefit distribution in excess of a given dollar amount). Still, others consider the Committee to be advisory in nature, with all decisions left to the Board of Directors or the CEO. The ultimate structure isn’t as important as making sure that the structure exists and is followed.
This authority is generally granted in paperwork called “governance documents.”
Beware of Documents with Lives of Their Own
Because the PA is a fiduciary and can be sued for mismanaging the plan, it is important that it operates according to the governance documents. Failure to do so may be a breach of duty that gives rise to liability. So, be sure that any authorizing document reflects actual PA operations and that the Committee follows the procedures that are adopted.
Ilene H. Ferenczy, Esq., CPC, APA is the managing partner and thought leader for Ferenczy Benefits Law Center, an Atlanta firm focusing on the practical issues affecting retirement plans, the companies that sponsor them, and the people who service them. She is the author of five books and more than 100 articles about retirement plans and is a former third-party administrator.