Learning the ropes of overseeing a retirement plan isn’t a “one and done” exercise. Periodic training updates for retirement plan committee members acting in a fiduciary capacity is a prudent approach ensuring that they maintain the current knowledge essential to carry out their duties. More fundamental is ensuring that new committee members get a strong grounding in plan operations and their responsibilities promptly on being appointed to a plan committee, if not before.
Start training them on key topics
In the beginning of their tenure, new plan committee members are often in the vulnerable position of not even knowing the topics they need to bone up on, let alone already knowing the essential information they need to possess within those topic areas. The good news is that most plan committee members are given some formal fiduciary training on joining the committee. Fewer receive follow-up training on a regular schedule, however.
In the past, fiduciary training often focused almost exclusively on overseeing plan investment performance and investment manager selection. Today, fiduciary training is often broader in scope, covering responsible supervision of all plan vendors and operations. The Plan Sponsor Council of America (part of the American Retirement Association) offers a training course on fiduciary training. Some topics covered in that course that companies should consider presenting to their committee boards include:
ERISA and the fiduciary role. Be sure your committee members know how they become a fiduciary, fiduciary roles, and when they are and aren’t acting as a fiduciary. Review fundamental duties, consequences of fiduciary breach, and limiting fiduciary liability.
Selecting and monitoring service providers. Highlight parties in interest and prohibited transactions under ERISA, the service provider exemption, plan vs. settlor expenses, fee disclosure requirements, scope, and the solicitation process.
Participant communications. Discuss reporting and disclosure requirements, fundamental fiduciary duties, fee disclosures, participant education and advice.
Other fiduciary topics to cover include federal ERISA enforcement priorities, highlights of recent landmark court rulings, and plan fee categories, including allocation methods and revenue sharing.
Step 2: liabilities
Retirement committee members are generally conscientious in their efforts to fulfill their fiduciary obligations to participants, even without fully weighing the adverse consequences should they fall short. Nevertheless, remind members what such penalties can be. For example, a plan loss attributable to a fiduciary’s negligence can result in plan committee members being held personally liable for a substantial portion of the loss. “Prohibited transaction” violations, inadvertent or otherwise, also can trigger large civil penalties against offenders up to 100% of the “amount involved.”
Although not required by the Department of Labor, many plan sponsors adopt a committee charter to outline the committee’s responsibilities. Committee members then sign the charter, stating acknowledgment and acceptance of their fiduciary responsibilities.
The doctrine of “procedural prudence” plays a large role in ERISA enforcement agencies and courts. (See “Ponder the true meaning of prudence.”) Educate members on procedural prudence, the duty of loyalty, lines of authority, and decision making dynamics. Plan committee members and other fiduciaries who diligently follow organized processes for decision making, even when bad results occur, often avoid penalties.
Train to avoid negligence
It’s more than worthwhile to put in the extra training for your plan’s committee members. And remember, as in other areas of education, e-learning platforms for self-paced retirement plan committee/fiduciary training can help eliminate the potential learning impediment of schedule conflicts.
The true meaning of prudence
A foundational concept in ERISA governing retirement plan fiduciaries is the “prudent man rule.” This requires fiduciaries to perform their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
But does that mean fiduciaries should, essentially, follow the herd? Tom Brakke, an investment advisor, educator and ERISA commentator, has posed that question in a recent blog post. Such herd mentality “can be problematic,” Brakke asserts, if the herd is moving in the wrong direction. For example, in the face of lower bond yields, many investment managers have sought to boost returns on pension portfolios by investing in more risky securities.
According to Brakke, fiduciaries discussing what constitutes prudence isn’t enough. Prudence, he maintains, “comes from exploration and examination, marked by acuity and practical wisdom.” This sets the bar higher than what Brakke characterizes as “prudence by rote,” consisting merely of running through checklists. While checklists can be helpful for fiduciaries, they can be too rigid for the real world.