Small-Plan Governance

Art by Eric Hanson

The Employee Retirement Income Security Act (ERISA) does not require a plan to have a committee, only a named fiduciary and plan administrator, says Joshua Itzoe, partner and managing director in the institutional client group at Greenspring Advisors in Towson, Maryland. Still, having a committee formally oversee one’s plan and adhere to guidelines such as an investment policy statement (IPS) and committee charter is a best practice. “My philosophy is, every great plan starts with a highly engaged committee,” Itzoe says.

Advisers working with small companies on their retirement plan should be prepared to educate the sponsor about the need for, and formation of, a retirement plan committee and what its functions should be, industry experts say. While 72% of plans with $50 million to $100 million in assets and 81% with over $1 billion in assets have an investment committee, only 46% of plans with $5 million to $10 million and 26% of plans with less than $1 million have a committee, according to the 2019 PLANSPONSOR Defined Contribution (DC) Survey.

“I’m not sure that running an effective committee is even a major concern for small plans because most small companies don’t know that the way to properly run a plan starts with forming a committee,” Itzoe says. “And once they do learn about the importance of forming a committee, they’re worried about the administrative overhead it would take to run it.”

However, advisers can help such plans get started with proper plan governance—sometimes that could be the very reason an adviser gets hired, sources say.

Another good foundational rule would be that, while large companies might have separate committees such as an administrative committee and an investment committee, small companies just need to start with one committee that combines both functions, Itzoe says.

Of his small-plan clients, Bruce Lanser, senior retirement plan consultant with UBS Retirement Plan Consulting Group, in Milwaukee, says, “We let them know that effectively running a plan is not just about investment results but truly trying to improve the outcomes for their employees. We find they are very receptive to this advice because they want to do right by their participants.”

Starting Small

So where is the best place to start? Advisers say that should be to determine who should be on the committee. “We recommend that the CEO, the chief financial officer [CFO] and, ideally, the head of human resources [HR] sit on the committee,” Lanser says. However, he says, at many small companies, the HR executive serves in a mostly administrative role and reports to the CFO; in that case, only the CEO and CFO would sit on the committee and take on the fiduciary responsibilities.

Itzoe agrees that the plan committee members should be the “key decisionmakers—the CEO or president, the CFO and someone else from finance, and someone from HR.”

How many members should the committee have? Greenspring Advisors recommends three to seven people, which works well for small companies, which often have few employees qualified for the role. “We tend to like smaller committees because, as they grow in size, it’s harder to make decisions,” Itzoe observes. “[Larger committees] tend to talk about the same issues over and over, because there are so many opinions.”

Many small companies will grow, and expectations and best practices will need to adapt as well. As to how the committee can evolve with the retirement plan and company, Itzoe says, “We generally recommend starting with at least three members to get diversity of opinion and the ability to create a quorum. But committees can expand as the needs of the plan and the plan sponsor change.”

Advisers can also help set up the important documents that will help small-plan clients adhere to best practices. These include the committee charter, which typically will formalize the purpose of the committee and specify the minimum number of members that are needed to serve at a time, according to investment advisory firm Conrad Siegel, in Harrisburg, Pennsylvania.

Committee Training

Once the committee is formed, UBS “starts the relationship with fiduciary training so the committee members know what they’re responsible for,” Lanser says. “As fiduciaries to the plan, their primary duty is to act in the best interest of participants. We then guide them through the process of making prudent decisions and educate them about the importance of documenting how they reached their decisions. We educate them about best practices, such as having an IPS, meeting regularly and keeping minutes.”

Cammack Retirement Group keeps the meeting minutes at the companies it serves, says Timothy Irvin, director and corporate markets practice leader, in the firm’s New York City office. “It’s as important as anything else is in documenting their decisions,” Irvin says.

The committees at the small companies Itzoe serves have told him that his most helpful advice has been to meet on a regular basis. From there, it has been “implementing a formal governance process—evaluating fees, benchmarking the plan against similar plans, finding gaps with current vendors, using employee engagement strategies. We cover all of the high points that we go over with our large plans,” he says.

When Greenspring has been hired by small companies that already have a committee in place, Itzoe has found these committees lack formal oversight. “Rarely have they gone through fiduciary training or have they created a formal charter,” he says. “If there is an IPS in place, they typically have gotten a boilerplate version from their recordkeeper or downloaded it from the internet. That could create more risk because it might be prescribing things not being done.”

Dannae Delano, a partner with Wagner Law Group, in St. Louis, says it is particularly helpful for small companies to have a retirement plan specialist adviser and an ERISA attorney take on the fiduciary duties. Because of the many lawsuits being waged against retirement plans, Delano has found that more smaller companies are hiring an adviser and working with an ERISA attorney.