Saturday, April 27, 2019

5 Things Your Plan Committee Members Need to Know

Over the past decade and change, there have been a number of high-profile excessive fee suits brought against retirement plan fiduciaries, notably the plan committees that oversee these programs. Here’s what your plan committee members should know.

1. Why they are a member of the committee.

Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary.

There is, or should be, a legitimate, articulatable reason why each and every member of your plan/investment committee was selected. They, and every other member of the committee, should know that reason. If you can’t articulate that reason (or can’t with a straight face), they shouldn’t be on the committee – for their own sake, and the sake of every other committee member.

Note also that, over time, committees have a tendency to expand, sometimes based more on factors like internal organizational politics than on valuable perspectives or expertise. But human dynamics are such that the larger the group, the more diffused (and sometimes deferred) the decision-making. So, it’s worth revisiting that articulatable reason – and making sure it’s still valid – on at least an annual basis.

2. That, as a member of the plan committee, each of them is probably a fiduciary. 

Committee members often do their work in relative anonymity – or did before the recent spate of ERISA litigation. That said, in a recent excessive fee case (Sacerdote v. N.Y. Univ.), the court – while delivering a verdict for the plan fiduciaries – nonetheless called out several committee members who “…displayed a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion-dollar pension portfolio and a lack of true appreciation for the significance of her role as a fiduciary” – including, in one case, a member who “…did not consider herself a fiduciary (but rather believed the Committee was the fiduciary).”

In that case, a federal judge also stated that “the hiring or appointment of a co-fiduciary does not relieve the original fiduciary of its independent duties,” that “no fiduciary may passively rely on information provided by a co-fiduciary,” and that a “fiduciary who delegates fiduciary responsibilities nonetheless retains a duty to exercise prudence” – a process that she likened to a “good old-fashioned ‘kicking the tires’ of the appointed fiduciary’s work…”.

Their role on the committee may be bounded in by the focus of that group – a focus on the investment and investment menu, for example. That said, if they’re on a plan committee, and they are influencing plan assets, they’re a fiduciary, and they should not only know that, but know what that means.

Of course, fiduciary status is based on one’s responsibilities with the plan, not a title. Simply stated, those who have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), are fiduciaries to the extent of that discretion or control – and that certainly includes committees that either make decisions regarding the hiring or firing of plan fiduciaries, or those that make decisions regarding the plan’s assets.

3. What being a plan fiduciary means.

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. In addition to paying only reasonable plan expenses, these responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, following the terms of plan documents, and carrying out their duties prudently. More precisely with the skill and aptitude of a person expert in such matters.

Even when the plan hires a professional investment advisor to help them – something that ERISA demands of plan fiduciaries when they lack the skill and knowledge of a prudent expert – in the NYU case above, the same judge pointed out that even then the committee could not “unthinkingly defer” to that advisor’s expertise. Rather, she said, in order to fulfill their duties, “…the Committee members must meaningfully probe” the advisor’s recommendations “and make informed but independent decisions.”

ERISA fiduciaries are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. What does that liability mean? Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets.

And since fiduciaries have potential liability for the actions of their co-fiduciaries, it’s also a good idea to… know who their co-fiduciaries are.

4. What’s in the plan’s Investment Policy Statement.

First, let’s acknowledge that the law doesn’t require that you have a written investment policy statement. Of course, if the law does not specifically require a written investment policy statement (IPS) – think of it as investment guidelines for the plan – ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And indeed, the vast majority of plans do have a written IPS – more than 90%, according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans.

More than that, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

5. What you’ll do to support them in this important duty.

Every plan, and every plan committee is unique. But the responsibility, and the prudent expert standard to which those responsibilities must be held has been called “the highest known to the law.” In forming and conducting the committee its imperative not only that the members be selected wisely, but that they be informed and engaged so that they can adequately and fully discharge those responsibilities.

One recent court decision (Wildman v. Am. Century Servs.) in favor of the plan committee defendants explains that the committee met regularly three times a year, and had “special meetings if something arose that needed to be discussed before the regularly scheduled meetings.” Moreover, the defendants testified that those meetings “were productive and lasted as long as was needed to fully address each issue on the agenda. On average, the meetings lasted an hour to an hour and a half.”

The plan provided “training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general.” That kit included a copy of the current Investment Policy Statement, and the court noted that “the Committee members read these materials and took their responsibilities as fiduciaries seriously.”

And if your committee does that – well, then you’ll have the makings of a great plan committee.

- Nevin E. Adams, JD

Saturday, April 20, 2019

That Sinking Feeling?

You may have missed it – but we just passed the anniversary of the 1912 sinking of the now iconic RMS Titanic, at the time the world’s largest ocean liner.

Its passengers included some of the wealthiest people in the world, as well as a large number of emigrants seeking a new life in North America. On the ocean liner’s maiden – and only – voyage, it carried 2,244 people, 1,514 of whom would perish in the North Atlantic.

In hindsight, the Titanic seems a textbook example of a disaster that could have been avoided: There were plenty of warnings about sea ice (as many as six), but the ship was traveling near her maximum speed (though it’s a movie myth that they were trying to set a speed record) when lookouts sighted the iceberg that did her in with a “glancing” blow – that nonetheless opened 6 of her 16 compartments to the sea (the ship was designed to stay afloat with four of her forward compartments flooded). And let’s not forget that she went to sea with a lifeboat rescue system designed to ferry passengers to relief vessels and return for more, not to hold the entire ship’s company while help arrived.

‘Flat’ Lines

I’ve not yet seen anyone link the nation’s retirement prospects to the Titanic, though the headlines routinely portray its condition in similar tones. Even today, it’s hard to believe that, despite the enormous expenditure of time and treasure, the retirement plan coverage “gap” – the number of workers with access to a retirement plan at work – has basically been flat… for the past 40 years.

Now, we all know that most of that coverage gap is self-inflicted. Nothing stops those uncovered individuals from stopping by their local financial services institution to open a retirement savings account – or taking the time to go online or boot up an app to do the same without leaving the comfort of their home. But we also know the realities of human behavior. And yet, despite all the alarmist headlines about retirement gaps and shortfalls, where’s the sense of urgency (see below)?

We know that even modest income workers are 12 times more likely to save for retirement if they have access to a plan at work than they are to take the time to open that IRA. Little wonder that in recent years the Retirement Confidence Survey (RCS) published by the Employee Benefit Research Institute (EBRI) and Greenwald Associates has noted a strong relationship between retirement confidence and retirement plan participation. How strong? Well, workers reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer are more than twice as likely as those without any of these plans to be at least somewhat confident – we’re talking 75% with a plan vs. 34% without.

It’s not that those who have an opportunity to save for retirement don’t have challenges – in making the sacrifices that allow them to save (while others don’t), in dealing with the inevitable emergency draws on finances (that elusive $400 that surveys routinely say individuals can’t amass in a crisis), or in trying to withdraw funds in a manner that will sustain them throughout retirement.
But having access to a retirement plan at work matters – and not just in confidence.

History tells us that the passengers on the Titanic had plenty of time to get to safety – but they ran short of lifeboats (more tragically, some of the lifeboats they did have weren’t fully utilized!).

Here’s hoping that an increased awareness of the impact of employer-sponsored plans encourages more to build these retirement “lifeboats” – and that those workers who are given the opportunity afforded by these programs, aided by tools like automatic enrollment, contribution escalation, and qualified default investment alternatives – take full advantage.

While there’s still time to do so.

- Nevin E. Adams, JD
Author’s Note: Several years ago, there was an NPR report titled, “Why Didn’t Passengers Panic on the Titanic?” in which David Savage, an economist and Queensland University in Australia, compared the behavior of the passengers on the Titanic with those on the Lusitania, another ship that sank at about the same time. Both were luxury liners, and both had a similar number of passengers and a similar number of survivors. The biggest difference in the reactions in these two similar circumstances, Savage concludes in the report, was time: The Lusitania, struck by a U-Boat torpedo, sank in less than 20 minutes, while the Titanic took approximately two and a half hours. Time enough, in the case of Titanic, according to Savage, for social order to prevail over “instinct.”

Saturday, April 13, 2019

Education Precedents

I’ve been working with retirement plans for my entire professional career, during which I have met, spoken with, and written to tens of thousands of plan sponsors. And yet, in all that time, and with all those people, I’ve not met more than a handful who had chosen that specific role as a career path. More often than not, they’ve found themselves in that role with no training, education or background in the role beyond an out-of-date plan document and the cryptic notes left behind by a harried predecessor.

Indeed, there’s more than a bit of irony that individuals who find themselves in a job with personal liability for their actions (and the actions of their co-fiduciaries), alongside an expectation of prudence that courts have described as the “highest known to man,” have had little in the way of practical, retirement-plan-focused training.

That’s a problem for those plan sponsor fiduciaries, of course, but also for the plan advisors who support them. While some may find it easier to lead someone who doesn’t know any better, every quality advisor I’ve ever met much prefers working with plan sponsors who know their job and responsibilities well enough to appreciate the value and contributions of a trained professional.

NAPA members have long valued the benefits not only of education in the field, but the ability – the critical need – to be able to stay up to date on the latest legal and regulatory developments. In addition to conferences, webcasts, and the NAPA Net Daily, we’ve helped you do just that. In the past few years, we’ve launched several NAPA credentials and certificates – the Certified Plan Fiduciary Advisor and more recently the Nonqualified Plan Advisor, as well as NAPA’s PracticeBuilder and Qualified Plan Financial Consultant (QPFC) credential.

Now it’s time for plan sponsors.

This need for education – and acknowledgement of expertise – of plan sponsors was one of the first items discussed with the Plan Sponsor Council of America as they joined the American Retirement Association. We’ve spent the past year in close collaboration with various subject matter experts, including volunteers and the leadership of the PSCA not only discussing this scope of this education need, but also developing a solution.

Last week we unveiled a new industry credential: the Certified Plan Sponsor Professional (PSCA CPSPTM), and – coincident with the NAPA 401(k) Summit – we are extending to NAPA Certified Plan Fiduciary Advisors the opportunity to extend complimentary access for some of their plan sponsor clients and prospects to the education program associated with the CPSP credential.

Leveraging the latest in online education technology and adult learning methods, this three-course, nine-module online program was developed by plan sponsors and some of the nation’s leading retirement experts to improve and enhance plan sponsors’ understanding of how to effectively evaluate, design, implement and manage a comprehensive employer-sponsored retirement plan. It deals with establishing organizational objectives, plan design, behavioral finance and employee engagement, investment concepts, fiduciary oversight and risk management, compliance, and even vendor management. In sum, it deals with a broad spectrum of issues, concerns and insights regarding retirement plan design and administration.

The education program is designed so that plan sponsors with varying levels of experience and expertise can move through the course flexibly – but provides enough detail and supporting resources that those who are still relatively early in a plan sponsor role can focus on needed knowledge points. Ultimately, those who attain the CPSP credential, by possessing the requisite experience and passing the rigorous credentialing exam, will have demonstrated that they have the knowledge and practical application skills needed to protect their organization from unnecessary fiduciary risk while helping their plan participants achieve better outcomes.

We’re excited about this new credential, and its prospects – not only for enhancing the knowledge and appreciation of dedicated plan sponsors, and for helping advisors add value to their relationships, but also for the positive impact that valuable, practical, timely education in the hands and minds of dedicated retirement plan professionals surely has on the outcomes from our nation’s retirement system.

You can find out more about the program, the credential and the PSCA National Conference, where we’ll be sponsoring a preparatory boot camp for plan sponsors, at

- Nevin E. Adams, JD