The Employee Retirement Income Security Act (ERISA) does not require retirement plan and investment committees to have a charter, but industry experts believe this is a best practice that all plan sponsors should seriously consider.
“When you learn that the charter is the road map to the fiduciary oversight of the plan, you realize how committee charters can be even more important than the investment policy statement [IPS],” says Mike Webb, vice president at Cammack Retirement Group.
“Because charters set forth procedures on how the plan fiduciaries are supposed to act, they can protect them in the event of litigation,” says Julia Zuckerman, vice president of retirement and health compliance at Segal.
Additionally, adds David Klimaszewski, a partner with Culhane Meadows, “The Department of Justice [DOJ] considers the procedures laid out in charters when determining penalties for fiduciary malpractice. If investigators see that the procedures were correct, even if the outcome was not, they are often less inclined to penalize a company. Having a charter in place for retirement and investment committees to follow is a valuable tool in maintaining compliance and avoiding penalties.”
Surprisingly, though, most of Sullivan & Worcester LLP’s clients, particularly the smaller ones, do not have retirement plan and/or investment plan committee charters, says David Guadagnoli, a tax partner with the practice.
Plan sponsors that have both a retirement committee and an investment committee will need a charter for each, he says. It is particularly important for sponsors to have charters when there are two committees to better delineate committee members’ roles, Guadagnoli says.
An investment committee charter should refer to the investment policy statement, which in and of itself sets out how “plan investments will be added, monitored and removed,” he says. “The charter will lay out the committee members’ responsibilities, which should include an annual review of the IPS and, perhaps, reporting to the plan administrator and plan sponsor any decisions made with respect to the investments.
“The retirement committee charter would lay out the administrative responsibilities required of the plan administrator in overseeing the plan,” Guadagnoli continues. “If the plan does not have a separate investment committee, it will also include investment oversight responsibilities. A retirement committee charter will typically delineate responsibilities for the plan generally, oversight of testing, and oversight of service providers, including a review of fees.”
The Retirement Learning Center says the charter should cover the following points:
- What authority does the committee have?
- What is the committee’s purpose?
- How is the committee structured?
- Who may serve on the committee?
- How are committee members replaced?
- How will the committee delegate authority?
- How will the committee assign responsibilities and duties?
- How frequently will the committee meet?
- What procedures will the committee follow?
- What are the standing agenda items and how are new topics introduced?
- What is the process for selecting and managing plan service providers?
- What reporting will the committee do and to whom?
- What are the procedures for protecting committee members financially?
Charters are very helpful for ensuring that all committee members understand their responsibilities and that nothing slips through the cracks, Guadagnoli says.
Lastly, Zuckerman says, it is critical for sponsors to follow the rules set forth in their committee charters. If they have a charter but fail to follow it, that is fodder for lawsuits to be filed.
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