If you have a pension plan, you have a fiduciary responsibility to ensure that your plan is compliant with regulations. You also have a responsibility to your employees, to help them to maximize their benefit under the plan. In order to meet these responsibilities, there are certain best practices that you should consider:
Put in Place a Pension Committee:
If you’re like most business executives, you are busy focused on the various aspects of running and growing your business. Your company’s pension plan is one of the last things your focused on. The problem is, whether you’re focused on it or not, you can still be held liable if something goes wrong. To ensure that your pension plan is getting the attention it requires to keep it in compliance with the various rules and regulations handed down by both the Department of Labor and the Internal Revenue Service, it is important to put in place a pension committee. The pension committee functions as a sort of the board of the pension plan, whose goals are to protect the benefits of the plan members and to conserve and enhance pension fund assets. Like any other board, the minutes of the committee should be maintained to memorialize the discussions that take place surrounding the plan.
Benchmark Your Plan:
Monitoring your plan’s investments is one of your fundamental fiduciary responsibilities. Investment performance should be reviewed at least annually, although ERISA recommends quarterly reviews as a best practice. Establishing a formal investment policy, that provides appropriate guidelines for selecting, monitoring, measuring, and making decisions for your plan’s investments is a critical part of the benchmarking process. To benchmark your plan, you should consider the following:
- Reviewing the fees charged by the investment manager and third-party administrators. This includes both the direct fees charged as well as the hidden fees included within the plan. If a plan invests in mutual funds, the plan should not be buying retail shares, but instead should be in lower cost institutional shares.
- Reviewing investment performance. Each investment alternative has risks and yields. Plan managers should be reviewing the return received based upon the risk undertaken and compare that to similar investments on a periodic basis. In instances where an investment is underperforming with respect to the risk, the investment should be replaced with a more appropriate investment.
- Ensure that an appropriate number and type of funds are included in the plan. While you don’t want to overwhelm employees with too many options, you want to make sure that all the key investment types are available; money market, bond, equity, etc. If your plan does not already offer target date funds, you should consider offering these. These are funds that develop a balanced investment strategy based upon the anticipated retirement dates of your employees, so that the target date fund of an employee retiring in 5 years is less risky/aggressive than one designed for an employee retiring in 20 years.
Educate Your Staff:
Most of your employees do not understand the importance of contributing to the retirement plan or how the time value of money dramatically benefits them the earlier they start. In addition, often times employees are intimidated by the various investment choices available. Rather than make a mistake, they opt to do nothing at all. You can really help your staff by ensuring that your plan custodian or broker speaks to your staff at least once or twice a year to explain to them why its important for them to contribute, how much they should contribute, what match provisions exist, and how they should invest their funds. This will not only assist them in preparing for retirement, but it could also have a significant impact on your ability to benefit from the plan as the more that employees participate, the less likely you will fail your nondiscrimination testing.
Consider Adding 3(38) and 3(16) Fiduciary Protection to Your Plan:
As a fiduciary of your plan, you have significant responsibility to your participants and a substantial liability if you do not appropriately carry out your responsibilities. The Employee Retirement Income Security Act (ERISA) holds you to high standards but does not really provide you with appropriate guidance as to what you’re supposed to do. Unfortunately, many fiduciaries don’t even know that they are fiduciaries or have any level of risk at all. Many organizations have elected to add 3(38) and 3(16) fiduciary protection to their retirement programs, reducing the burden on in-house HR staff and mitigating risk that the plan is not compliant with relevant regulations.
- In a 3(16) fiduciary relationship, you can outsource many of your responsibilities to a specialized plan administrator that takes complete responsibility for all aspects of your plan administration, assuming full discretionary control. This does not completely absolve you of your fiduciary responsibility, but it does shift much of the liability to the 3(16) fiduciary. The 3(16) fiduciary signs off on the ERISA plan related documents, making them liable for plan errors.
- A 3(38) fiduciary has the authorization to make investment decisions for the plan. In situations where a 3(38) is not present, you would typically get advice from a financial or plan advisor, and then you would determine the direct course of action. The 3(38) takes you out of the equation.
As a fiduciary, you can never completely eliminate your risk, however, by putting in place key controls, documenting the procedures performed, and surrounding yourself with individuals that can help guide you through the regulatory environment, you can significantly reduce your risk.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.