The Importance of Retirement Plan Committee & Annual Reviews
Retirement plans are complex and have many moving parts; as such, most plan sponsors create retirement plan committees to help keep their plans running smoothly. They are usually called either “Investment” or “Administrative” committees and typically range in size from two to ten people. Regardless of the name or number of people involved, the committee’s organization, process and documentation are key to the plan’s long-term success.
One important function of a retirement plan committee is regular, ongoing reviews of the plan’s performance with regard to investments, fees and company goals. Here is an overview of what a retirement plan committee does and the type of information it should review at least once a year.
What does a retirement plan committee do?
A retirement plan committee is responsible for making operational and investment decisions for the company’s retirement plan. These decision must be made on a fiduciary basis, i.e. in the best interest of the plan, its participants and beneficiaries.
Specific committee duties typically include:
Evaluating the plan’s design and effectiveness
Selecting outside consultants and vendors, such as third party administrators, recordkeepers and plan advisors
Reviewing, monitoring and, when necessary, approving changes to the plan’s investment menu
Reviewing and approving plan expenses
As such, committee members’ fiduciary responsibility is significant.
Committee Charter
When a retirement plan committee is founded, its composition and operating procedures should be documented in a Committee Charter. The committee should then review the charter regularly to ensure it remains relevant.
A retirement committee charter generally details:
The committee’s purpose
How often the committee meets
How members are selected and their associated roles and responsibilities
Membership requirements (such as term limits)
Committee members don’t have to be financial or investment experts. That said, with rare exceptions, all committee members are held to a fiduciary standard.
Investment Policy Statement (IPS)
A primary duty of the committee is selecting, monitoring and managing the plan’s investments. The committee should carry out this process according to a specific investment philosophy and strategy outlined in the plan’s Investment Policy Statement (IPS), which typically includes:
Guidelines and procedures for those assisting in the investment process, such as retirement plan advisors
Criteria for fund and investment manager selection and procedures for identifying replacements
Benchmarks for measuring key criteria such as investment performance (both relative and absolute), changes in management, investment style, expenses and assets under management
However, retirement plan committees must be cautious not to use the IPS as a “catch-all” for plan-related policies. This document is called an IPS because it should focus solely on the management and monitoring of the plan’s investments. Anything else potentially exposes the committee to unnecessary fiduciary risks and liabilities. Having to uphold provisions set forth in the IPS that do not relate to investments could put the committee in worse shape than having no policy statement at all. [1] The committee should review the IPS at least once a year, and revise it as necessary.
Service Providers
The committee should also follow specific criteria for hiring plan service providers, and evaluate their fees each year. In general, the committee should focus less on fees in a vacuum, and instead on determining if the fees are reasonable for the quality and scope of the services provided. In addition, the committee should carefully document its decision-making process regarding fee evaluations and the hiring and firing of service providers.
Fee Benchmarking
Similarly, the retirement plan committee is responsible for regularly evaluating the plan’s investment fees. A quality retirement plan advisor will provide the committee with detailed documentation regarding the plan’s fees and expenses. Given its fiduciary liability, the committee should ensure that the advisor also provides a comprehensive fee breakdown, in particular as it pertains to any revenue sharing or other fee-sharing relationships.
Retirement Plan Goals
Retirement plan committee reviews may reveal whether or not a plan is performing in line with the company or organization’s broader goals and benefits philosophy.
Specifically, the committee should determine if the plan meets expectations in the following ways:
Providing employees a benefit to help them retire confidently and with dignity
Recruiting and retaining top talent
Easing the administrative burden of the plan
Fostering employee engagement and participation
Encouraging healthy savings rates
Helping executives to save adequately as a percentage of total compensation
If the plan falls short in any of these areas, the committee should consider changing elements of the plan’s design or provider mix accordingly.
By conducting regular reviews, a retirement plan committee stays attuned to its plan’s performance, fees and overall effectiveness. A well-informed retirement plan advisor can help in that vein by sharing new tools and services of interest with the committee as well as helping it make critical decisions surrounding the go-forward features and benefits of the plan.