A client recently asked about the fiduciary responsibilities of the board of directors of the sponsor of a 401(k) plan. This column is a summary of my answer.
The first and most basic principle for the governance of ERISA plans is that the plan sponsor is the primary fiduciary for the plan. As a result, until the fiduciary responsibilities are delegated, they reside with the corporation and, therefore, with the board of directors. That was made clear in the Enron litigation, where the trial court found that the plan's reference to the corporation meant that the members of the board (and, particularly, of the board's compensation committee) were the primary plan fiduciaries.
Fortunately, most plan documents delegate much of the investment and administrative responsibility to one or more committees. In that way, the responsibility is moved from the directors to the corporate officers and managers who serve on the plan committee.
However, the responsibilities of the board are not eliminated completely. Even where a committee is appointed, the board remains responsible for the selection and monitoring of the members of the committee. To fulfill that duty, the board members must, at the least, prudently:
- Select committee members.
- Monitor the members of the plan committee.
- Monitor the activities of the plan committee.
These responsibilities are documented in guidance by the U.S. Department of Labor and in court decisions; here are quotes from a court case and the DoL:
"Implicit in [a fiduciary’s] power to select the Plans’ named fiduciaries is the duty to monitor the fiduciaries’ actions."
"Thus, an appointing fiduciary has a duty of oversight to promote compliance with ERISA’s fiduciary obligations and to prevent misconduct or injury….In accordance with these duties of ‘surveillance and oversight’…, the Defendants [including the members of the Compensation Committee of the Board] had an obligation to monitor the Administrative Committee’s conduct and to take appropriate action if the Committee was not adequately protecting the interests of the Plans’ participants and beneficiaries."
To satisfy those fiduciary responsibilities, the board should take several steps, including:
- Review whether the members of the plan committee are appropriate for the task; for example, do they have the right experience and abilities? Typically, a committee includes officers or managers with backgrounds in finance (for example, the CFO and the controller), human resources and benefits (for example, the Vice President for Human Resources and the Benefits Director), and perhaps an attorney from the legal department—although my preference is that the lawyer not be a member, but instead attend the meetings as an adviser.
- Create a procedure where the committee reports in writing to the board at least once a year on its activities during the prior year. At the least, the report should show that the committee met as needed (usually quarterly or more frequently); that the committee worked with competent advisers; and that the committee focused on ongoing operations and topical issues, such as the quality of the investments, the fees and expenses of the plan and the investments, the payment of revenue-sharing, the services offered by the plan and the results produced, avoidance of conflicts of interest, and so on.
- Establish a procedure where, after the report has been distributed to the directors, the chairperson of the plan committee attends the board meeting, makes a presentation about the report, and answers questions from the directors. Assuming that the report is adequate, it then should be approved by the board.
This review does not need to be at a detailed level. In other words, the board is not required to “re-do” the work of a committee. Instead, its responsibility is for oversight—that is, to make sure that the job is being done and that the committee members understand their responsibilities.
Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.