A Prudent Process

The fiduciary rules require that fiduciaries, such as plan committees, engage in prudent processes to make decisions about the operation of their plans. That raises two questions. First, what is a prudent process? And, second, what decisions must be made through that process?

In response to the first question, the key for engaging in a prudent process is that the fiduciaries be familiar with the subject matter of the decisions they need to make. The “familiar” requirement is sometimes called the “prudent expert” rule. Fortunately, the law does not require that the fiduciaries—the committee members—be experts in their own right. Instead, they can rely on knowledgeable and experienced financial professionals. But one way or the other, expertise has to be part of the equation.

A prudent process starts with the information needed to make an informed decision. Thus, the first step is to identify and gather the information that a person who is familiar with an issue would want to review. The law refers to that information as the “relevant” information. If committee members don’t have the knowledge to do that (for example, aren’t familiar with mutual fund share classes and their availability or aren’t knowledgeable about revenue sharing payments to recordkeepers), they should turn to their financial professionals for help. 

It’s important for committee members to ask questions and to make sure they understand the answers. 

Once the relevant information is obtained, the committee members should read and understand it. Again, though, they can turn to a competent financial professional for help. It’s important for committee members to ask questions and to make sure that they understand the answers. 

Once that information has been evaluated, the committee must make a decision that bears a reasonable relationship to that information. In other words, the committee must make a “reasoned” decision. 

In sum, a prudent process is one in which a fiduciary makes an “informed and reasoned” decision in the best interest of the participants. 

What are the decisions to be made and how should a committee make sure that they make those decisions and monitor them at appropriate intervals? That is the job of well-structured agendas for committee meetings.

 

Plan Committee Agendas

Most plan committees meet on a quarterly basis. This article follows that approach by allocating committee responsibilities and best practice issues over four quarterly agendas. Assuming that the plan is operated on a calendar year, the first quarter agenda would be for the period from January 1 to March 31; the second quarter would be from April 1 to June 30; and so on.

The First Quarter

• Review of minutes of prior meeting, including discussion of any action items from the last meeting that have not been resolved.
• Quarterly investment review.
• Fiduciary training.
• Review of mutual fund share classes and other potential investment vehicles (such as collective investment trusts, if available).
• Report and discussion about revenue sharing and usage (including an expense recapture account, if any).
• Report on new investment concepts and new investment services. 
• New or additional matters.

The Second Quarter

• Review of minutes of prior meeting, including discussion of any action items from the last meeting that have not been resolved.
• Quarterly investment review.
• Review of compensation of service providers, including benchmarking of total direct and indirect compensation and consideration of quality of services (as well as any participant complaints about services).
• Discussion of best practices for improving participation, level of deferrals, participant investing, and retirement readiness, including benchmarking participant results against competitors.
• Review of participant communications.
• Review participant practices, including plan loans and defaults, hardship withdrawals, defaults, and QDROs, and associated plan policies.
• Review of plan design (including comparison with competitors) and consideration of alternatives for improving plan results.
• Review ERISA bond and fiduciary liability insurance. 
• New or additional matters.

The Third Quarter

• Review of minutes of prior meeting, including discussion of any action items from the last meeting that have not been resolved.
• Quarterly investment review.
• Report and discussion about missing and nonresponsive participants.
• Report on legal developments, including fiduciary lawsuits, and IRS and DOL guidance.
• Report on retirement industry trends, including new development for best practices.
• Review cybersecurity at plan sponsor, including education of participants, and review of cybersecurity practices and agreement with service providers.
• New or additional matters.

The Fourth Quarter

• Review of minutes of prior meeting, including discussion of any action items from the last meeting that have not been resolved.
• Quarterly and annual investment review.
• Review of investment policy and compliance with policy, and consideration of changes or additions to IPS.
• Review of fee and expense policy and compliance with policy, and consideration of revisions to policy.
• Outline annual report to Board of Directors of activities of plan committee. 
• New or additional matters.

A good practice is to make sure that all decisions are reviewed on a scheduled basis. 

Concluding Thoughts

This article is “food for thought” about how to structure the agendas for plan committees to make sure that they address the decisions, including monitoring, that must be made. While the law says that monitoring must be done at “appropriate intervals”, a good practice is to make sure that all decisions are reviewed on a scheduled basis, and for that purpose, an annual review can be an effective risk management approach.

The agendas also include a number of “best practice” items, to assign time for committee members to consider improving their plans and the participant results.

There isn’t any requirement that any particular issue be discussed at a specified quarterly meeting. So the lists in this article are just suggestions that can be modified to suit the circumstances of a committee. The takeaway is that the fiduciary road covers a lot of territory, especially when you include best practices. 

A well-designed set of agendas can serve as a roadmap for that journey.