“In today’s environment of increased litigation and plan design innovation, having a highly effective retirement plan committee has never been so important,” says an article in the latest edition of next, Nuveen’s quarterly retirement newsletter.
The article suggests that today’s workforces are becoming more diverse both generationally and culturally, and as a result, retirement plan committees must match this trend. Diversity comes in many forms. Gender, race, religion, age, culture, socioeconomic background, education and functional expertise all contribute to adding unique perspectives to plan decisions, according to the article.
A paper released by Vanguard in 2014—although about investment committees—noted that socially diverse committees may sometimes be able to work more quickly and efficiently. And, even though committees with information-processing diversity may take longer to reach a consensus, the multiple viewpoints can foster better decision making skills and more creative solutions. Having a more diverse committee, with members possessing differing viewpoints, may also lead to the development of better conflict resolution skills, the paper says.
Brendan McCarthy, national sales director, DCIO, Nuveen, based in Boston, says it is important first that retirement plan sponsors fully understand their fiduciary responsibilities and their risks as fiduciaries. Once they understand those, they need to build a highly effective plan committee, which includes the right number of members and the right demographics represented.
“Committees will have representatives from HR, finance and legal departments, but it is important to have diversity in the committee representative of the retirement plan participants. A diverse committee will have better governance practices,” McCarthy says.
He adds that a 2016 McKinsey study found that a team is 157% more likely to understand its consumers when at least one member is from their same demographic group. With retirement plan committees, the consumers are plan participants.
Perspective and Understanding
Gordon Tewell, principal of Innovest, in Denver, says traditionally, retirement plan committees were comprised of C-level employees from HR and Finance departments, and mostly representative of older generations, but now there are more members of younger generations in the workforce.
“If committee members are all C-level, highly paid, older employees, the won’t understand the pain of participants who live paycheck-to-paycheck and what it means to be an employee who wants to be in the plan but can’t defer or defer at the level he’d like to defer,” Tewell says.
He adds that a pure C-suite committee is also the most challenging to work with as a consultant. “They are so busy, and we want to meet regularly,” he says.
“If a large portion of the workforce is Millennials, plan sponsors will want to have at least one Millennial on the committee who will better understand that demographic group’s saving needs,” McCarthy says.
He points out that it’s hard for a committee of all 50-year-old, white males to understand how Millennials or different races view their retirement savings needs and what appeals to them. Someone from those demographics on the committee will be able to inform. “They can especially help with how different demographics view education and communication, which is usually designed or approved by the retirement plan committee,” McCarthy says.
According to Tewell, Innovest sees good diversity on committees. “We do a lot of work in the governmental market, and they look for diversity,” he explains. Tewell sees active employees and retirees, males and females, and executives as well as staff represented.
McCarthy suggests that when plan sponsors look for people to fulfill roles on the retirement plan committee, they look at the biggest demographics in the workforce. It doesn’t matter if they pull from management or first line workers.
“Picking the right people varies by organization,” Tewell says. “While there are committees where we see bottom line involvement, plan sponsors may also use these folks for an advisory type of committee, in which they are not fiduciaries or decision makers, just a group that has interaction with the committee that runs the plan.”
Engagement Remains Critical
Tewell adds that plan sponsors want committee members to be engaged, and they need lots of education about what their roles will be and how important it is to be on the committee. He says education is cumulative; members learn things with every meeting. However, they need upfront education about fiduciary responsibilities. They also need education around practical processes.
“Committee members have duties of loyalty and prudence, but they need a practical approach for how to fulfill those duties—how to make the decisions they need to make,” Tewell says. And, even though there is diversity in the committee, each member should understand they are not representing a constituency, but all groups.
According to McCarthy, the right number of committee members is contingent on the company itself. “In general, there should be an odd number to make it less likely to have tie decisions,” he says. “And having more than 10 can get unruly.” Plan sponsors should consider the size of the company, McCarthy suggests, as well as the number of locations and how many times the committee will meet. “We usually see seven to 10 committee members,” he says.
Tewell says, “We don’t like to work with committees of less than five or much more than nine members. In smaller committees, the members representing diverse groups may not get a majority vote, but in larger committees, they will have more input.”
According to Tewell, diversity in retirement plan committees is a timely topic, as clients bring it up on a regular basis.
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