Investment Committee Solutions for Small Plans

Plan sponsors with no committees must still perform committee functions.

By Karen Wittwer | May 05, 2015
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According to professionals in the retirement industry, most new sponsors of small or micro plans are unaware of the duties of prudence, loyalty and diversification of investments that a fiduciary to a plan assumes—or that the Employee Retirement Income Security Act (ERISA) decrees they are a fiduciary. And, surveys have shown many small-plan sponsors are confused about their fiduciary role.

Many are also unclear that, while they have no investment committee—the individual making plan-level decisions, in essence, is that committee and must perform much the same functions the committee of a mega plan does.

For the unwary plan sponsor, this disconnect could be costly, says Jim Phillips, president of Retirement Resources. “Whether its investments or plan design or operational decisions—those are held to the prudent expert standard, so there is no defense of ‘Gee, I did my best, I didn’t know any better, it’s just a small plan, it’s only me’—none of those excuses work. Someone is obligated to operate the plan up to the prudent expert standard,” he tells PLANSPONSOR.

Small-business owners are usually spread thin. “He’s probably the salesperson, the service person, the accounting person, the maintenance person. He may work 80, 90 hours a week, and the 401(k) is an afterthought,” says Jim Sampson, founder and managing principal of Cornerstone Retirement Investors.

Sometimes, too, the sponsor’s lapse may be a result of more than his other priorities. Phillips points to a void in any formal communications—from the Department of Labor (DOL), Internal Revenue Service (IRS) or vendors selling plan products—to tell new 401(k) sponsors what ERISA demands. “Unless at some point along the sales process that pops up as a discussion point, it’s entirely possible that person will not know about his fiduciary duties,” he says.

He recommends a variety of free resources such as pages on the DOL website written specifically for plan sponsors and T. Rowe Price’s guides on fiduciary compliance in running an ERISA-governed plan. Classes, too, such as those through the Plan Sponsor University, can be found online and in local colleges—although Sampson, an adjunct lecturer on the topic, has found that small business owners, as a group, do not attend.

However they attain it, once armed with full knowledge of their fiduciary status, small-plan sponsors must come to terms with their capabilities—to what extent they realistically can play, or must delegate, the investment committee role—and the plan’s requirements.

Most owners adopt the investment committee role, as they are already sole decisionmaker for their firm. “‘I own the place, I’m just going to make the decisions,’” Sampson says. This arrangement can better serve the company—appointing other employees exposes them to liability while accomplishing little, Sampson says. Many just rubberstamp the owner’s vote to avoid his displeasure. “One man, one vote” also quickens the process, he tells PLANSPONSOR.