The following article originally appeared in PlanAdviser Magazine
“It’s a tremendous task,”
says Ary Rosenbaum, managing attorney at The Rosenbaum Law Firm, P.C., Garden
City, New York, of retirement plan administration. “There is approving
trustees, recordkeepers, custodians, third-party advisers, financial advisers,
auditors and ERISA [Employee Retirement Income Security Act] attorneys.” And
that is just for starters.
To deal with their many
responsibilities, retirement plan experts believe having a separate
administrative committee—or at least outlining and assigning responsibility for
its duties—is prudent to ensuring that a retirement plan runs smoothly. This
entails monitoring a host of service providers, including the recordkeeper, payroll
provider and trustee, and may include, in partnership with the investment
committee, acting as the plan’s fiduciary. While Fortune 500 and Fortune 1000
firms typically form distinct and separate investment and administrative
committees, small to midsize plans with fewer than 1,000 employees tend to roll
up both retirement plan responsibilities into a single committee.
The administrative
committee—sometimes called the fiduciary committee or retirement plan
committee—also needs to determine plan expenses and fees, benchmark them
against industry standards and now, due to 408(b)(2) and 404(a)(5), says sure
that plan providers clearly disclose fees, Rosenbaum says.
In fact, the new fee
disclosure rules are prompting some plan sponsors to, for the first time, form
a bona fide administrative committee. “Fee disclosure is really a
game-changer,” Rosenbaum says. “Having to understand the fees associated with
their plan is making sponsors more sophisticated and responsible, [in search
of] formalized policies and procedures.”
Says Larry Karle, vice
president at Longfellow Advisors in Boston: “An administrative committee is
considered ‘nice’ to have, but it is key. A lot of advisers are missing the
boat on guiding their plans to form an administrative committee, which oversees
the entire operation of the plan, starting with contributions and loans being
submitted accurately and on time [and] oversee[ing] the vendors and third-party
administrator to make sure they are doing their job to the standards of ERISA,”
he says.
“We have seen a lot of
plans without formal committees. Those days are over,” agrees Tim Slavin,
senior vice president of defined contribution (DC) at Broadridge Financial
Solutions, Lake Success, New York. “That casual approach will not insulate you from
participant complaints or lawsuits.”
Here follow six critical
responsibilities of a retirement plan’s administrative committee.
1) Agenda and Oversight. While the investment committee focuses on the investment
menu, the administrative committee is tasked with the nuts and bolts
underpinning the plan, according to Roger J. Rovell, president of Fiduciary
Partners Retirement Group of Clearwater, Florida. (For more about investment
committee responsibilities, see “Leading the Way,” PLANADVISER, September/October
2012).
Administrative committee
meeting agendas generally start with reviewing service providers, Rovell says,
which includes vendor performance, cost analysis and fee benchmarking. Next up,
he says, are accounting questions, concerning, for example, the timely and
accurate investment of contributions, hardship loans, required minimum
distributions, qualified domestic relations orders (QDROs) and the allocation
of administrative costs to participants in a revenue-sharing agreement.
Then, on an ongoing basis
over the course of the year, there is the matter of plan design, including
automatic enrollment, automatic increase, in-plan Roth conversion, and matches,
Rovell continues. As to the effectiveness of the plan, the committee needs to
address participant database analysis, retirement-readiness assessment, and
participant education and/or investment advice. Last but not least, Rovell
notes, are the legal issues, including: fiduciary governance and training,
legislative developments, plan audits and filing the plan’s annual Form 5500
with the Department of Labor (DOL).
2) Reviewing Recordkeepers and Third-Party Administrators. To fulfill all of these tasks, the
administrative committee needs to make sure the plan’s vendors and third-party
administrators (TPAs) are doing their jobs.
“What we bring to the
table is oversight, organization and plan expertise,” Karle says. “At least on
a semiannual basis, sometimes quarterly, we do fiduciary monitoring of the
plan, keeping an eye on plan design to make sure it is up to date. Plans are
getting more and more complex. Advisers can assist plan sponsors and
administrative committees and help them work more cost-effectively with vendors
by bringing their knowledge of the retirement plan business and how these plans
work, are structured and are priced.”
The DOL, in a February
white paper titled “Meeting Your Fiduciary Responsibilities,” suggests an
administrative committee and advisers properly vet the plan vendors, asking
TPAs about their financial condition and retirement plan history, along with
the identity, experience and qualifications of the executives who will be
handling the plan’s account. Ask which services are bundled and which are
charged separately, as well as who pays the fees—the employer, the plan or the
participant—says the DOL.
In the past, plan
sponsors would hire service providers and retain them without question for
years. That is now changing, especially in light of the new fee disclosure
rules, says Robert J. Gordon, senior financial adviser with Investor Solutions
in Miami. Administrative committees must continuously monitor service
providers, vet requests for proposals (RFPs) and document these assessments,
Gordon says. “The responsibility of reviewing proposals from competitive
recordkeepers and third-party administrators falls to the administrative
committee, which must assess their quotes and service offerings to fulfill this
fiduciary objective.”
Once a service provider
is hired, the administrative committee and adviser must ensure “their pricing
is correct, service is being delivered and there are no ERISA conflicts of
interest or self-dealing,” Gordon says. The committee might even go so far as
to “hire a third-party accounting firm to vet the service providers, including
the firm that does an independent audit,” he says.
Bonnie Fawcett, senior
vice president and director at PNC Institutional Investments in Pittsburgh,
agrees that the new fee disclosure requirements have prompted plan sponsors to
ask more questions about efficiency and transparency. Fawcett predicts this new
concern will prompt many plans over the next two to three years to move away
from bundled plans to those offering institutional share classes and
competitively priced á-la-carte services.
3) Membership. The
administrative committee should consist of three to seven people, who meet
every quarter, experts agree. Typically, a member of human resources or
employee benefits sits on the committee, along with the chief financial
officer, the chief compliance officer or general counsel, a member of the
investment committee and, to represent the company’s rank and file, one or two
department managers or leading employees. The administrative committee also
needs a secretary, who will take minutes of its meetings and keep these on file
for seven years, experts say. At some companies, the makeup of the
administrative committee is the same as the investment committee. When the
committees are separate, coordination and communication are vital, Karle says.
For instance, if the investment committee selects a target-date fund (TDF) as a
qualified default investment alternative (QDIA), the administrative committee
needs to know since it oversees education.
In larger companies with
boards of directors, the board often selects administrative committee members.
In some cases, advisers themselves sit on or monitor administrative committee
meetings, notes Slavin. The board monitors the administrative committee on an
ongoing basis to make sure members are doing their job and meeting their
fiduciary responsibilities. At the beginning of the year, the committee
provides a 401(k) status report to the board.
4) Fiduciary Responsibilities. Hiring a bundled recordkeeper or TPA does not absolve the
administrative committee of its fiduciary responsibility, stresses Karle.
“People commonly think outsourcing equals redemption of liability.” That is not
true, which is why the expertise of an adviser is crucial for a sponsor and its
administrative committee, he says.
“The administrative
committee has ultimate fiduciary responsibility for the plan, even if they hire
service providers,” notes Sarah Simoneaux, founding partner of Simoneaux &
Stroud Consulting Services in Marco Island, Florida.
Advisers should make
administrative committee members aware of their fiduciary responsibility and
provide ongoing fiduciary training, according to Joshua Itzoe, partner and
managing director of Greenspring Institutional Client Group in Towson,
Maryland.
L. Scott Austin, a
partner with Hunton & Williams, based in Dallas and Atlanta, advises
working with an ERISA attorney to help the committee and its adviser
“understand their fiduciary obligations under ERISA,” he says.
“The big, big thing that
the administrative committee wants to make sure of is that the plan remains
qualified, such as with discrimination testing and making the required minimum
distributions for those age 70 and a half,” Fawcett says.
5) Plan Benchmarking and Best Practices. Increasingly, plan sponsors and
advisers are interested in how closely they are running a plan in line with
industry best practices, says Gordon. There are many resources for advisers and
plan sponsors to use for fiduciary training and benchmarking their plans, some
available through recordkeeper relationships and some separately.
“We report on plan health
metrics, plan design and the expected results from automatic enrollment and
escalation,” says Blake A. Thiebault, senior vice president at Heffernan
Financial Services in San Francisco. “Offering an optimal plan to boost
retirement readiness has become increasingly important to sponsors.”
Diversified,
headquartered in Harrison, New York, equips plan sponsors and their
administrative committees with quarterly report cards on how well their plan is
operating, says Senior Vice President and General Counsel Marc Cahn. This
includes detailed data and analysis on participation rates, deferral rates,
loans and hardship withdrawals, he says.
An effective
administrative committee and adviser have it within their power to “take a good
401(k) plan and turn it into a great 401(k) plan,” says Don Healey, president
of The Healey Group of Harrisburg, Pennsylvania. “It might mean going out and
doing an RFP to make sure you have the right vendors, the right plan benefits,
the right investment options—and that participants are making the best use of
the plan to maximize their retirement growth years,” Healey says.
6) Information and Education. The administrative committee is responsible for making sure
participants receive information about investments, fees and expenses. The plan
has the additional option of offering education and advice, according to the
DOL. The information starts with a summary plan description that the department
calls “a plain-language explanation of participant rights and responsibilities,”
including: when and how employees become eligible to participate; the source of
contributions and contribution levels, such as employer matches, automatic
enrollment and default investments; the vesting period; and how to file a claim
for those benefits.
Then, every quarter, the
plan must provide participants with an individual benefit statement showing
their account and vested balances, the DOL says.
In sum, plans with a
dedicated administrative committee have more robust plans, higher participation
rates and better protection, Gordon says. “I absolutely recommend having an
administrative committee,” he says. “If the DOL ever audits the plan, they are
not looking for results as much as they are processes and prudent practices,
because they know that no one can promise results.”