As an employee benefit plan sponsor, you could face harsh consequences for failing to satisfy ERISA requirements as they relate to plan fiduciaries. One of the best ways to defend against these liabilities is to form an effective employee benefit plan governance committee.
The actions of your plan governance committee will be critical when it comes to minimizing potential exposure to fiduciary violations that can lead to DOL enforcement actions or private litigation. Therefore, you should perform adequate due diligence and follow industry best practices when constructing and managing your governance committee.
Choosing Committee Members
The Board of Trustees usually takes the lead in selecting governance committee members because this board typically retains fiduciary obligations. The board should nominate members who understand and respect ERISA’s fiduciary principles. While committee members aren’t required to be experts in retirement plans or investments, they should meet minimum qualifications to serve while satisfying ERISA’s standards.
The responsibilities of a plan governance committee may include the following:
- Hiring and evaluating the performance of plan vendors, such as the plan recordkeeper and investment advisor;
- Designing and operating the plan, including government reporting and employee communication and education;
- Establishing uniform plan policies and procedures;
- Setting rules for determining benefit eligibility; and
- Overseeing the plan’s claims procedure and loan programs.
The size and structure of your governance committee will depend on the size and complexity of your employee benefit plan. If yours is a large, complex plan, you’ll probably need more committee members than if your plan is relatively small and simple. In short, your committee should be big enough to handle the workload but small enough to remain manageable. Three to seven members is the ideal size for a governance committee.
Instead of naming specific individuals to the committee, it’s a good idea to name committee members by their job function—such as the head of finance, human resources, or legal. This will simplify things if a committee member leaves the company or can no longer serve.
Explain Fiduciary Obligations
It’s important to explain to members their fiduciary obligations and liabilities as members of the governance committee and have them accept their fiduciary role in writing. You might decide to indemnify committee members from personal liability that could emerge should a breach of fiduciary responsibility occur.
While committee appointments can be permanent, many sponsors today choose to set term limits. Rotating committee members helps bring fresh insights and perspectives to discussions and deliberations. Terms should be long enough to permit continuity of plan oversight, and they should be staggered so there are always a few experienced members on the committee.
The Governance Committee Chair
It’s wise for the Board of Trustees to establish a committee charter that formalizes the committee’s mission, structure, objectives, and responsibilities while detailing its specific duties. The charter may also include rules for committee governance, such as holding meetings at regular intervals (e.g., quarterly).
Once your legal counsel reviews and approves the charter, it should be adopted by a resolution of the Board of Trustees. A chairperson should then be appointed to lead committee meetings and make sure meetings are documented with detailed minutes, decisions, and action items.
A Vital Responsibility
Establishing and effectively managing an employee benefit plan governance committee is one of the most important responsibilities of plan sponsors. Take a close look at your governance committee to make sure it is serving in the best interests of your plan and participants.