Leah E. Dean, Esq.

Barbie has a great day every day! Well…almost every day. Today she got a call from an upset participant in the Dreamhouse LLC 401(k) Plan (the “Plan”). Barbie is the Chief Executive Officer (“CEO”) of Dreamhouse LLC. Her Chief People Officer (“CPO”), Ken, handles the administration of the Plan. The upset participant, Allan, told Barbie that he had been participating in the Plan since 2018 and consistently saw losses or very poor returns on his plan investments. He and his wife (who works for Toy Story, Inc.) were discussing their finances and comparing their 401(k) accounts when they noticed very large discrepancies between their account sizes (and they were both maxing out their deferrals each year!). Allan realized the difference in their retirement savings was due to the investment returns – and his were awful.

Allan decided to go to Ken’s office and ask him about how he and the other Dreamhouse executives picked the funds the Plan is invested in. Ken just smiled and replied, “Not sure. I’m just Ken.”

Barbie was not thrilled when she heard about Ken’s response. Not only did she find it terrible for someone whose job it is to take care of the Company’s employees to be so unconcerned, but Ken is the Chair of the Plan Committee that selected the investment alternatives for the Plan. The more Barbie thought about Allan’s visit, the more worried she became that Allan could contact the Department of Labor or try to take his grievances to court. She called up her third-party administrator, Skipper, and asked her how she would handle this situation.

What Duties Do Barbie and Ken Have Related to the Plan?

While the goal for most companies that offer self-direction of investments to their participants is to avoid liability for the returns, that avoidance only happens if certain rules are met.  In particular, the individuals responsible for running the plan (generally referred to as the plan’s fiduciaries) have to act according to the standards outlined by the Employee Retirement Income Security Act of 1974 (“ERISA”), which include prudence, acting solely in the participants’ interests, and following the rules of the law and the terms of the Plan document.  In particular, ERISA’s standards require that plan fiduciaries exercise care at a level of someone who knows what they are doing, and acts for the benefit of the participants. This includes making sure the investments are diversified to minimize losses, ensuring any fees required for the administration of the plan (including those associated with the plan’s investments) are reasonable, and hiring service providers for the plan that are reasonable and appropriate.

Skipper told Barbie that the Plan Committee – including both Barbie and Ken — are fiduciaries of the Plan, and, therefore, need to make sure that they are making smart decisions related to the investments and administration of the Plan. Skipper explained that Ken is not just Ken. He has to understand that he owes duties to the Dreamhouse employees and his role is vital to the Plan.  Perhaps more important, the decisions he makes can be scrutinized by the DOL and the courts if participants do not feel he is acting in their best interest. While neither the Company nor the fiduciaries are financially responsible for investment losses that may occur due to changes in the market, they could be responsible for some or all losses if the funds they chose are objectively substandard.

How Can Barbie and Ken Make Sure They Are Doing Their Due Diligence?

Barbie asked Skipper how exactly she and Ken can make sure that they are acting prudently. Skipper stressed the importance of having proper procedures in fulfilling their duties.  One of those procedures should be documenting the considerations and process they went through when making decisions related to the Plan. Let’s say Allan and other disgruntled participants decide they want to sue Barbie, Ken, Dreamhouse LLC, and the Plan for the losses they have suffered due to exceptionally high investment fees. And let’s say (perhaps naively!) that Barbie and Ken actually reviewed the Plan’s investment carefully and prudently before making their decisions.  If Barbie and Ken have kept little to no records, it will be hard for them to prove that they went through a proper procedure when they selected and monitored the poor performing funds (or, for that matter, made other decisions related to the Plan). However, if they diligently take notes and keep records/minutes of all meetings, they can demonstrate to the DOL or the court a paper trail of their decision-making that may support that they did their job well, notwithstanding the investment performance.

In relation to plan investments and operations, it is a good idea for the Plan Committee (when a company has one) to have Bylaws that outline the authority of the Plan Committee (for example, does it just give advice to the Board of Directors, or can it make actual decisions on behalf of the Plan) and how it makes decisions.  An Investment Policy Statement adopted by the Company or Committee can also give the Committee structure as to how the Company expects it to operate with regard to Plan investment decisions and oversight.  These kinds of governance documents can help everyone know what they can and cannot do and how they should fulfill their responsibilities.

Practically speaking, having a written set of practices and procedures ensures everyone involved in the administration of the plan is on the same page. And there’s an added benefit:  help when there’s turnover. Turnover at a company is frequently where we see breakdowns happen in plan administration. Having a solid base of governance materials in place helps train replacements and avoids these breakdowns. So, if Ken decides – either voluntarily or involuntarily — to leave Dreamhouse and pursue his dream of being a surfer, Barbie will have the help she needs when she hires the new CPO and has to train them on Dreamhouse’s procedures with respect to the Plan.

Based on these recommendations, Barbie and Skipper agree to contact the Plan’s investment advisor and schedule a full review of the Plan’s investment performance … soon! In the meantime, Skipper provides some information to Barbie about the standards for reviewing plan investments, as well as the availability of benchmarking systems and other tools.  Barbie smiles again, knowing that she knows how to move forward to make sure that her participants are happy with the Dreamhouse Plan.

Conclusion

Plan governance is important for many reasons. It helps the plan sponsor keep track of why certain decisions were made and ensures everyone at the company who is assisting with the administration of the retirement plan is uniform in their decision-making procedures related to the plan. Additionally, in the event a participant has questions or if the IRS or DOL come knocking, having written governance documents (and using them!) gives a plan sponsor concrete processes to share.

If you or a client needs help establishing practices and procedures and other governance materials for their retirement plan, contact us. After all, we are your ERISA solution!