Good Housekeeping for Retirement Plan Governance
- Aug 7, 2023
Housekeeping is the management and routine support activities of running an organized physical institution occupied or used by people, like a house, hospital or factory, such as tidying, routine maintenance and bill payment.
Plan governance involves the same activities: the management and routine support activities of running an organized retirement plan used by plan participants, such as depositing deferrals, reviewing investments, document amendments, nondiscrimination testing and 5500 filings.
Just as housekeeping involves inspecting the areas to be maintained, plan governance requires ongoing due diligence to monitor IRS and Department of Labor (“DOL”) requirements. Good controls, policies and procedures can provide the oversight needed for maintaining plan documentation that is effective and compliant. Effective governance can prepare you for a plan audit or compliance check, thus mitigating risk. Plan participants will also have a better experience when the plan operates efficiently.
Strengthening the Process
Housekeeping is a support service that does not directly generate income and is considered a “back of the house” department. Too often, plan governance is considered similarly, and its support function is overlooked. Plan governance streamlines decision-making, delegates duties and oversees plan investments and service providers. In other words, plan governance keeps things tidy.
This organizational process includes putting things in their proper place to facilitate plan maintenance. A sample structure is outlined below:
1. Overall Plan Governance:
- Processes and Procedures
2. Plan documentation:
- Signed plan document and adoption agreement
- Amendment process
- Plan amendments
- Board resolutions
- Summary plan descriptions and summary of material modification
3. Investment Policy and Management
4. Compliance Monitoring
5. Participant Disclosure and Communication
6. Annual Plan Review and Reporting
Your organizational efforts will be more effective with a governance structure in place. This should include a calendar of governance activities that documents all actions, communications, and decisions.
Overall Plan Governance
During the Victorian era, the housekeeper was employed to manage the household and the domestic staff. As such, the housekeeper was the immediate representative of the lady of the house. During this “ERISA” era, the plan fiduciary is the immediate representative of the participants. This position brings the following duties:
- Duty of care
- Loyalty to plan participants and beneficiaries
- Prudence in exercising responsibility
- Diversification of plan assets
- Follow plan documents as consistent with the law
- Avoid prohibited transactions and conflicts of interest
Too often, implementing a retirement plan involves signing an adoption agreement, leaving the plan sponsor as the named fiduciary. The failure to name a committee as the fiduciary opens the door to all C-suite executives being considered fiduciaries. Furthermore, vicarious liability expands to the work performed by others for those executives.
The fiduciary should implement policies and procedures to meet their obligations under ERISA by forming committees accepting key areas of fiduciary responsibility, such as an investment committee to oversee investment selection and monitoring and an administrative committee to handle hiring third-party service providers. As a part of the policies and procedures, you should collect fiduciary acknowledgments to make sure that they maintain awareness of their responsibilities, keeping in mind that it continues to be your responsibility to maintain oversight of those fiduciaries and service providers.
Establishment of a Retirement Plan Committee
Initial meeting minutes should document the adoption of a charter and other governance policies. A retirement plan committee charter typically includes:
- Criteria for selecting committee members, such as department representation (e.g., finance and human resources) and preferred experience, as well as the process for replacing them
- Process and criteria for hiring and monitoring service providers
- Frequency of committee meetings (quarterly is preferable) and which member will take meeting minutes
- Number of members needed for a quorum
Administrative documentation should include:
- List of all outside service providers and consultants and documentation of your monitoring activities
- DOL 408(b)(2) plan fee and service disclosure from the covered service provider; review of services, costs, reconciliation of plan data and transactions; benchmarking information and Service Organization Controls reports
- Documentation of committee changes
- Copies of any fiduciary liability insurance
- Required fidelity bond from the insurance provider
Ongoing maintenance should include:
- Minutes of each committee meeting
- Succession planning
- Documentation of educational seminars
- Training and educational materials
- Updating the list of plan fiduciaries, along with signed acknowledgments and formal resignations
- Review and renew insurance coverages
Not only does ERISA require a written plan document, but the plan document outlines the terms and conditions of the retirement plan. It breaks down how the plan will operate based on chosen plan design features, like eligibility requirements, contribution requirements, vesting schedules and distribution rules. The IRS uses the plan document to help determine whether the plan complies with regulations and qualifies for tax benefits. Failure to maintain the plan document can result in disqualification of the plan. This is what you should have on file:
- A list of everyone who has oversight over the plan document, both individuals and committees, with a clear designation of who is accountable for ensuring the operation of the plan in accordance with the terms of the plan document
- Signed plan document and adoption agreement
- Amendment processes for legally required regulatory and/or legislative amendments, as well as voluntary plan design changes
- Amendments to the plan and associated adoption agreements
- Board resolutions adopting the plan/amendments
- Summary Plan Description (“SPD”) and any Summary of Material Modifications (“SMM”)
Because plan document maintenance can be complicated, the fiduciaries should evaluate the process and controls it has in place for maintaining compliance. The following is a sample list of questions that the plan committee might consider in evaluating the effectiveness of their controls over the plan document:
- Is someone responsible for reviewing the plan terms and comparing them to plan operations at least annually?
- Is the plan document or any amendment reviewed to identify when specific actions are required and by whom? Are controls in place to make certain that such parties execute such actions where required?
- If changes are made in payroll, employment practices or through the addition or removal of business segments, divisions or related enterprises, is someone responsible for evaluating the impact of such changes on the intent for the
- plan’s operations and whether amendments to the plan terms are necessary?
- Is someone employed by the plan sponsor tracking required plan amendments? How do they keep up to date with changes to laws?
- If the sponsor relies on a service provider for required plan amendments, is there a contract requiring that all required amendments be provided? Is someone charged with reviewing amendments for accuracy and consistency with existing policies and procedures or desired operational changes?
- Is there a procedure to confirm that required plan amendments are identified properly and timely executed by the authorized parties and recorded?
- Is there a procedure to verify that any plan amendments are forwarded to the necessary parties – such as legal counsel, third-party administrator, payroll provider or compliance advisor? Is there a follow-up procedure to ascertain that the impact of such changes has been properly recognized and the applicable systems revised accordingly?
- Is there a procedure to update and maintain the summary plan description, employee handbooks, new employee informational handouts, employee intranet pages, enrollment forms and related documents that present plan information?
- Does the sponsor retain signed copies of all prior plan documents and amendments?
- Does the sponsor or its service provider apply for a determination letter from the IRS? If yes, does the sponsor retain copies of the determination letter application and the related IRS response on individually designed plans or the opinion or notification letter on a prototype or volume submitter plan? Are procedures in place to make sure that any actions required to receive the determination letter are properly documented and executed?
- Are procedures in place at the plan sponsor to periodically test that the plan is operating in consistence with the plan document, particularly when there has been a plan amendment or a change in personnel or providers?
ERISA requires the plan to diversify investments to minimize the risk of loss. Fiduciaries are responsible for selecting and monitoring plan investments. The fiduciary must follow the "prudent person" standard and act with the care, skill, judgment and diligence that a prudent person in a similar capacity would use under similar circumstances.
Since the benefit committee will be responsible for monitoring the plan investments, look beyond the chief financial officer or the person from the finance department for this singular purpose. While everyone on the committee will have their strengths and individual interests, the proper exercise of one’s fiduciary duties requires that each person on the committee be held equally responsible for every action the committee takes. Committee members who lack financial aptitude should not simply defer to the CFO’s opinion during the investment review. Having a CFO or other financial expert on the committee does not absolve the other members of responsibility for any financial matters. Rather, it provides a source of expertise and information that the other members can draw upon and learn so that they may make prudent decisions on behalf of the plan.
Prudence can be demonstrated by having the following on file:
1. While not required, an investment policy statement (“IPS”) demonstrates procedural prudence. The IPS should meet the following requirements:
- Documentation demonstrating how the investments in your lineup comply with your IPS.
- Document compliance with ERISA section 404(c) (if applicable)
- Confirm that the plan's Qualified Default Investment Alternative (“QDIA”) has been reviewed for compliance with applicable guidance.
2. Minutes from the committee meeting during which the planned investment options were decided or monitored, including discussions with the investment consultant
3. A printout of the plan investment menu page signed by committee members
4. Periodic investment return and risk reporting
5. Annual investment review
6. Discussions of appropriate investments, including alternatives considered
7. Comparison of investments to benchmarks as established in the IPS
8. Decisions on whether investments continue to meet the IPS and whether they should be retained or replaced, along with the rationale for any changes
9. Review of annual fee disclosures and an assessment of reasonableness
Retirement plan sponsors face greater challenges today than ever before. Regulatory scrutiny is on the rise, with the DOL and IRS actively reviewing Form 5500 filings for evidence of noncompliance, inaccurate reporting and excessive fees. Electronic filing has made it easier than ever for regulators to perform queries of retirement plans. The agencies can assess significant penalties for late tax filings and fees to go through a correction program to fix qualified plan violations. Penalties can also be assessed at a personal level on plan trustees for a breach of fiduciary duty. These corrections can be costly, time consuming and disruptive to business.
Timely, accurate reporting is vital. Retirement plans must file a Form 5500 and provide various notices yearly. It is important to keep a calendar of due dates and carefully review draft reports for completeness and accuracy.
The most common Form 5500 errors include marking incorrect boxes, providing inaccurate data, incorrectly reporting expenses and filing the form late. Additionally, large retirement plans, generally defined as plans with more than 100 eligible participants (or account balances after 1/1/23), need to attach audited financial statements to their Form 5500. Hiring an auditor experienced in retirement plan audits can help meet reporting requirements and fiduciary responsibilities.
Another best practice includes conducting internal checkups. The most common plan audit errors are not following the plan’s definition of eligible compensation to calculate contributions, not implementing auto-enrollment features correctly and not remitting participant contributions on a timely and consistent basis. Circumstances that can increase risk and may require additional oversight and checks of controls include:
- Changes in third-party administrators (“TPA”) or custodians
- Changes to payroll companies or adding new employees, compensation plans or fringe benefits
- Adding a new division or mergers/acquisitions
The plan should have documentation of internal controls in place to confirm:
- Accurate plan data needed for testing and reporting is collected, and the results of the testing are reviewed;
- Timely plan contributions and a written review of the timeliness (download and maintain copies of contributions reports) are made;
- Timely benefit payments and a written review of the timeliness (download and maintain copies of distribution reports) are made;
- Required minimum distributions (“RMD”) are made in the appropriate time frame;
- Nondiscrimination testing is performed
- Loan eligibility and documentation (download and maintain copies of the reports on loan information, loan issuance, loans in arrears, and loan repayments);
- Hardship withdrawal eligibility rules and documentation;
- Ongoing contribution limits monitoring; and
- Documentation of participant notifications if limits are exceeded, and the actions taken.
Participant Disclosure and Communication
Retirement plan fiduciaries must distribute certain information to plan participants from time to time. These disclosures equip plan participants with the information necessary to make timely and informed decisions about their plan account. However, these important participant disclosures can also be spread throughout the year, making their distribution seem like an overwhelming fiduciary responsibility to many retirement plan sponsors. Fortunately, the third-party administrator (“TPA”) will shoulder most of the burden by preparing the necessary notices related to your plan. You'll just need to confirm that each is distributed timely using an acceptable method. Typically, this responsibility can be easily managed using an administration checklist.
Below is a sample list of DOL and IRS required disclosures:
- Individual statement to separated participants with deferred vested retirement benefits
- Summary Plan Description
- Summary of Material Modifications
- Summary Annual Report
- Notification of benefit determination (claims notices or explanation of benefits)
- Plan document upon request
- Periodic retirement benefit statement
- Statement of accrued benefits and nonforfeitable benefits
- Qualified default investment alternative (“QDIA”) notice
- Automatic contribution arrangement notice
- Qualified domestic relations order notices
- Automatic rollover notice
- Participant plan and investment fee disclosures
- Section 404(c) plan disclosure
- Annual notice of effective opportunity to make or change
- Elective deferral election
- Safe harbor notice
- Qualified automatic contribution arrangement (“QACA”) notice
- Eligible automatic contribution arrangement (“EACA”) notice
- Safe harbor discontinuance notice
- Eligible rollover distribution notice (Special Tax Notice)
- Explanation of automatic rollover
- Consent to distribution explanation
- Qualified joint and survivor annuity explanation
- Qualified domestic relations order notices
- Universal Availability notice
Annual Plan Review and Reporting
When we discuss the annual review reporting, the first thing that comes to mind is Form 5500 and any associated audited financial statements. The fiduciaries should review the form to verify that the financial or trust statements agree to the Form 5500. This review should include the footnotes that outline the major plan provisions. Any discrepancies should be immediately reported to the financial institution and the auditors.
Next, review the actual services you provided to the plan or what was done on the plan from a plan management perspective. This is a great opportunity to document the fulfillment of ERISA duties and obligations. This can be accomplished by creating an activity report of the items that were accomplished during the last plan year. The report might read as follows:
- Amended the Investment Policy Statement
- Quarterly investment reviews were conducted with the financial advisor
2. Fiduciary updates
- Acceptance of trustee resignation
- Conducted fiduciary training
3. Service providers
- Reviewed 408(b)(2) disclosures
- Renegotiated TPA contract
4. Participant communications
- Provided for distribution of 404(c) notice
- Educational seminar on beneficiary designations
5. Plan administration
- Conducted an analysis of participant activities
- Conducted a participant satisfaction survey
Second, review and update the Investment Policy Statement (“IPS”) if necessary. One of the easiest ways to increase liability with a retirement plan is to have an IPS and not follow it. Review the guidelines for managing plan assets and verify that the plan is being managed according to those guidelines.
The annual review is another opportunity to confirm that the investments in the plan remain suitable and appropriate for the participants. Any discussion regarding plan investment performance, benchmarking, or changes needs to be documented since ERISA’s tests of prudence are based on process and not performance.
Finally, implement a plan management timeline for the upcoming plan year. By scheduling key fiduciary events and participant services, you demonstrate a reliable process and create a more diligent approach to managing the retirement plan.
While we could not be as thorough as the 2,000-page Mrs. Beeton's Book of Household Management, first published in 1861, we hope to have offered some insight to help you keep your retirement plan tidy. In the book’s preface Isabella Beeton wrote:
What moved me, in the first instance, to attempt a work like this, was the discomfort and suffering which I had seen brought upon men and women by household mismanagement.
And with the same advice can be given for maintaining retirement plans: do not let your plan be mismanaged or untidy.
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Stephen Mehaffey is an Associate Director in the firm’s Tax Services Group and has over 25 years of accounting experience.
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