When was the last time your 401(k) plan structure and compliance procedures were discussed at a Board meeting? If you cannot remember the last time, or if you cannot remember the details of what was reviewed, then the topic belongs on an upcoming Board meeting agenda.
While day-to-day administration of the plan would fall to management, the significant governance, risk management, and compliance implications of 401(k) plans make this an important topic for high-level Board oversight.
Company management should present the following information to the Board and be ready to answer questions on these topics:
- Who is the ERISA “named fiduciary” responsible for the overall administration of the plan? This is typically the Company or an “administrative committee.”
- Who are the 401(k) plan trustees? Are they “investment fiduciaries”?
- Which other Company employees are responsible for 401(k) plan administration?
- Who are the service providers to the 401(k) plan and what are their roles? This would include identifying those providers with fiduciary duties to the plan.
- What fees are charged by these service providers and how do these fees compare with industry benchmarks? How long have these relationships existed and when was the last time their terms were evaluated or other options explored?
- What insurance coverage is in place with respect to fiduciary liability of the plan trustees or the Company and its employees (as plan sponsor or named fiduciary)?
- Is there a charter or other organizational document for an “investment committee,” administrative committee, or similar body? If so, that document, along with any modifications suggested by management, should be presented to the Board.
- What are the plan assets and plan investment options, and how are these options selected, monitored, and reviewed?
- How are the Company’s recordkeeping responsibilities being documented, including management of investment committee meeting minutes, etc.? The Company employee responsible for this documentation should attend the Board meeting to answer questions.
- What procedures are followed to ensure prompt transmittal of employee 401(k) contributions (wage withholdings) and employer matching contributions to the 401(k) plan?
Any temptation to turn the presentation over to the Company’s financial adviser should be resisted. This is a Company responsibility led by Company management, and management should be literate on these topics.
There have been enough examples of litigation against 401(k) plans (and the plan sponsors) and there is enough controversy around the Department of Labor’s rules regarding fiduciary duties of advisers to 401(k) plans that the Board meeting could include a presentation by legal counsel on the risks associated with 401(k) plan administration and the reasons these questions should be asked. And of course financial information on the plan – and when plan audits are required and the scope and findings of those audits – can round out what should be an informative Board presentation. Finally, be sure the Board meeting minutes reflect the Board’s consideration of these important topics.
It is likely that this process will identify potential improvements – either those recognized by management as they prepare for the Board meeting presentation or those driven by good questions from the Board.