Guest Article

How A Retirement Plan Committee Equals Prudent Risk Management

By Jeb Graham CEBS, CIMA® of CapTrust Financial Advisors, an independent consulting/advisory practice focused on the institutional retirement plan market, serving corporate, closely held, non-profit and governmental organizations. You may contact Jeb at 813.218.5008 or jeb.graham@captrustadv.com.

The essence of managing fiduciary liability is prudent decisions made by well informed individuals. The idea that a committee is appropriate for this role is a blinding flash of the obvious. But in this day and age where committees are often put in place for very insignificant matters, why is it that so few employers have such groups established for the purpose of optimizing their retirement plan decisions?

Why are committees formed?

Generally speaking, there is one of two reasons for a committee: The organization needs to formulate decision alternatives on particular subject matter but is lacking knowledge, experience or expertise. A committee is formed to gather information and develop the necessary knowledge. The second reason is there is a general level of knowledge, but the decisions are sufficiently important that it is prudent to have multiple perspectives.

All too often committees are formed for political rather than practical reasons, and the participants may end up resentful of the time commitment and lack of accomplishment. A common problem is the committee not producing results, but instead simply producing process, where in most cases, results are the objective.

One of the few real world situations where process is more important than results is the world of fiduciary liability associated with retirement plans under the rules of ERISA... An effective committee, with well informed members, combined with sound policy and documented process is one of the best defenses against fiduciary liability.

Are such retirement plan committees common? It depends on standards applied to consideration of the "committee." While many employers may have designated a team of individuals as decision makers for their retirement plan, it is rare to see a retirement plan committee that is well conceived, organized and consistently well run.

The reasons for such a void, despite the apparent logic and reason, are likely a result of several common problems that are consistent across all industries and types of employers.

1. Lack of commitment - If senior management is content with mediocrity and the retirement plan is a low priority, a committee is worthless.
2. Lack of knowledge - Although much information is available, most fiduciary decision makers lack sufficient expertise to evaluate alternatives. The employer simply never gets to the point of operating from strength and is at the mercy of the product provider.
3. Lack of process - Sometimes good intent is insufficient. Part of effective process is acquiring knowledge…many employers don't get past this point. Whether hired internally or externally, there must be enough knowledge to create the process. While employers frequently engage outside parties in consulting or advisory roles, they don't evaluate credentials very thoroughly and end up with an insurance agent or stock broker that really doesn't specialize in retirement plans. The result is inefficient process that produces no real value.
4. Lack of follow through - Even when a sound process is established it is of little value if not consistently executed, i.e. an Investment Policy Statement that is simply a document in the files that is never reviewed or adhered to.

Guidelines for establishing a Retirement Plan Committee

1. Get the right people involved - the most senior executives do not always make the best committee members, particularly if they are simply a figurehead and not actively participating.
2. Acquire sufficient expertise - most employers will need to engage outside expertise to help lay the foundation and establish process for the committee. Thoroughly evaluate the expertise of the advisor/consultant to make sure they are committed to being retirement plan experts. Don't simply select someone because they are proven experts in other areas such as group benefits or life insurance. Don't select the personal investment advisor to one of the committee members or senior managers because he or she is a known entity. If you hire outsiders, make sure they are retirement plan experts.
3. Give them authority to impact decisions. One of the best ways to prevent a committee from making a successful impact is to delegate operational responsibility without giving any authority to resolve problems. A frequent occurrence is the president or CEO overriding the selection of an outside party or forcing the committee to give favor based on personal relationship rather than qualifications for the role.

The Result

If run properly, the committee will improve the overall management of the plan. Process will be in place to select appropriate advisors, consultants or service providers. The plan fiduciaries will have measurements for service and a format to review total plan cost vs. value being received. An Investment Policy Statement will describe the how, what, why, when and where of investment management selection. A clear strategy will exist for participants to get the advice and guidance they need to build a secure future based on realistic expectations. In short, the plan will be "working" as it should.

This material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. The views contained herein are the opinions of the author. It is not intended as legal or tax advice. CapTrust Advisors, LLC is a Registered Investment Advisor with the SEC. CapTrust is not a legal or tax advisor.

Other articles by Jeb Graham: Looking Under the Hood of Your 401k to Understand the Real Costs, Does Your Organization's Retirement Plan Measure Up? and The Importance of Legal Counsel Review.

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