For US-based employers, retirement plans are a highly valued employee benefit. In many industries, a good defined contribution (DC) plan is a competitive necessity to attract and retain the best talent. But how do you create one?

There are many types of retirement plans. Within each type, the options vary in cost and complexity. Given the regulatory complexity and increase in fiduciary litigation, employers should engage in thoughtful, advance planning to secure the intended outcomes of retirement plan sponsorship. Employers can create a solid foundation for good fiduciary practice by establishing their plan with well-defined roles, responsibilities, and procedures.

Settlor vs. Fiduciary Decisions: What’s the Difference?

It’s crucial to keep in mind the distinction between business, or “settlor,” decisions and fiduciary decisions. Designing a plan entails settlor decisions—the decisions of the settlor (creator) of the trust. These decisions are not subject to the fiduciary standards in the ERISA (Employee Retirement Income Security Act of 1974 [BK1] ), which require the fiduciary to act “with an eye single to the interests of the participants.”

Whether to establish a plan
What kind of plan to establish
The plan’s optional terms (within Internal Revenue Code constraints), such as:
- Who participates
- How much (if any) is the employer’s contribution
- How long a worker must be employed with the company in order to vest
- Automatic enrollment
- Participant-directed investment
- Distribution options

Once decisions are made to establish a plan and its terms are chosen, implementing the plan requires the sponsor to appoint plan fiduciaries to exercise fiduciary responsibilities.

Implementation includes a broad range of decisions, which normally include:
- Selecting a recordkeeper
- Selecting service providers
- Ensuring that the plan is properly communicated to employees
- Selecting an appropriate array of available investments
- Monitoring the investments or the service providers charged with selecting the array of investments
- Managing day-to-day plan administration

Once the plan is established, the employer might want to change terms (distribution options or benefit formulas) or one day terminate the plan. These actions, however, are not fiduciary functions.

Retirement Plan Checklist

Here is a checklist of 10 key considerations when establishing a retirement plan. These considerations cover most scenarios and are therefore comprehensive. However, depending on the industry, goals of the plan, and/or changes to rules and regulations, additional considerations may be warranted. Be sure to consult with an expert in cases like these.

SELECT OR DESIGN A PLAN THAT IS COMPATIBLE WITH YOUR BUDGET AND ADMINISTRATIVE COMPLEXITY

Retirement plans are generally either defined contribution (DC) or defined benefit (DB) plans. DC plans include, for example, 401(k)s, in which the outcome is an undefined amount of money, meaning that what the employee has at retirement is the sum of any employer contributions, employee deferrals, and earnings. With DB plans, the outcome is the benefit payable at retirement, which is calculated under a formula contained in the plan document.

Beyond that basic categorization, a number of decisions can help tailor the plan to the company’s specific goals and workforce. These choices include eligibility, vesting, distribution options, employer matching, automatic enrollment, plan loans, hardship withdrawals, whether the plan or the employer pays plan expenses, and whether participants will direct the investment of their own accounts. Coordinating goals with a realistic assessment of the available budget and staffing is time well spent toward attaining a well-tended, workable plan.

Avoid creating a plan with complicated features that turn out to not have been properly understood or even needed. Correcting operational mistakes is expensive and time-consuming. Minimize them by carefully selecting and understanding what terms you can reasonably administer from the very beginning.

THINK THROUGH AND CODIFY FIDUCIARY RESPONSIBILITYS UNDER ERISA

Basic ERISA fiduciary responsibility. Fiduciaries are required to act solely in the interest of participants and beneficiaries and with the care, skill, prudence, and diligence that a prudent person acting in a like capacity would exercise under similar circumstances and with like aims [ERISA Section 404(a)(1)(B)]. ERISA fiduciaries must also avoid conflicts of interest and acts of self-dealing [ERISA Section 406(a) and (b)] and must administer the plan in accordance with its terms [ERISA Section 404(a)(1)(D)].

Generally speaking, an ERISA fiduciary is an entity or person who has or exercises discretionary authority or control over the management or administration of the plan, exercises any authority or control over the management or disposition of its assets, or renders investment advice for a fee or other consideration. Note how functional that definition is. In addition to the roles generally perceived to carry fiduciary responsibility, such as a plan’s trustee, administrator, or investment manager, a person or entity may be found to be a fiduciary without intent, authorization, or even awareness of functioning as a fiduciary.

And that matters! A fiduciary can be liable for losses to the plan caused by breaches of fiduciary duty and, under certain circumstances, for losses caused by other fiduciaries under co-fiduciary principles. Civil penalties and excise taxes are also part of the government’s enforcement arsenal. A fiduciary’s best defense is the establishment of and careful adherence to procedures for various decision-making contexts that are designed to enable fiduciaries to determine and evaluate available options and select the one that is, in their judgment, best fitted to the situation and to ensure a decision is made solely in the interests of participants and beneficiaries and is prudent and cost effective. For example, written procedures for selecting service providers would set out key guidelines and processes, such as a request for proposal (RFP) procedure designed to result in the selection of a well-qualified provider for a fee that is no more than reasonable.

Allocation of fiduciary responsibilities. The employer will have fiduciary responsibility in administering any plan it establishes. But the employer can delegate some of these responsibilities to particular persons or committees and allocate responsibility to unrelated fiduciaries by carefully defining and delineating fiduciary responsibilities in plan and trust documents and establishing a process for delegation. For example, if members of the Investment Committee exercise only investment duties, they will not normally be responsible (and potentially liable) for the actions of the Administrative Committee (unless subject to co-fiduciary liability by participating in, enabling, or knowingly concealing the other fiduciary’s breach).

The employer can also insulate itself from potential liability by allocating discretionary fiduciary authority to providers of administrative or investment management services. For example, a company could appoint an investment manager (a 1940 Act advisor, bank, or insurance company) as a named fiduciary (with delegated discretionary authority over the investment of all or a portion of the plan’s assets) to select and retain the investment options offered to participants. The employer is then normally liable only if it falls short in prudently appointing and monitoring that named fiduciary investment manager.

This allocation among various fiduciaries must be clearly delineated in the plan and/or trust documents and should be consistently carried through in service contracts, with the appointed service provider acknowledging fiduciary responsibility and precise duties, and in communications to employees and in the investment policy.

CREATE THE PLAN’S GOVERNANCE STRUCTURE

Good plan and risk management requires determining in advance who makes decisions and how they will be made. Define responsibilities. Decide whether the employer’s responsibilities will be exercised through a committee, several committees, or by a specific officer or officers. In establishing a committee or committees, specify by title or name the committee members, operating rules, and requirements. Specify how the committee is to work; for example, establish voting procedures, the frequency of meetings to review the plan’s operations or investments, and provisions for keeping and retaining minutes to memorialize decisions and the reasoning supporting them.

DETERMINE WHICH SERVICES ARE NEEDED TO ADMINISTER THE PLAN

Understand what needs to be done depending on the specifics of the plan, as well as compliance, transaction, and participant disclosure obligations. Tasks likely include:

Drafting or reviewing the plan document, trust agreement, adoption agreement, recordkeeping, and other service provider contracts, initially and as amended.
Investing plan assets or selecting investment vehicles from which participants may select their own investments in compliance with the investment policy statement.
Recordkeeping—keeping track of participant accounts (money in; money out; handling distributions, including loans and withdrawals; and reflecting investment earnings) and asset custody.
Annual discrimination and other compliance testing.
Preparing and distributing participant communications that may include summary plan descriptions (needed initially for all types of plans), summary annual reports, enrollment materials, a summary of material modifications, annual fee disclosures, safe harbor notices (when matching contributions take the place of non-discrimination testing), automatic enrollment notices, tax notices, and qualified default investment alternative notices.
Insurance—a fidelity bond is required, and fiduciary liability insurance is advisable.
Determining eligibility to participate and interpreting other plan terms, including contribution limits, withdrawal provisions, and hardship and loan provisions.
Determining how the Internal Revenue Code, and particularly it’s qualification requirements, and ERISA apply in specific situations and to specific plan terms.
Keeping track of beneficiary designations.
Handling divorce orders that purport to divide a participant’s plan benefits.
Handling claims and appeals.
Coordinating with payroll.
Answering participant questions.
Auditing.
Obtaining an actuarial valuation (DB only).
Monitoring changes to the law requiring plan amendments and participant notification.

Decide how the company will provide these services. If the company does not have the resources or expertise in-house, we suggest hiring service providers. ERISA requires that fiduciaries have (or hire) the experience, knowledge, and expertise that the circumstances require.

Fiduciaries are required to ensure that fees paid out of the plan are reasonable. However, evaluating such fees can be difficult when, for example, services are bundled, or revenues are shared. We cannot overemphasize the importance of this evaluation. Plan expenses (paid by the plan rather than by the employer) have become a hot spot in fiduciary litigation. For instance, fiduciaries have been faulted for not understanding the revenue sharing or not selecting the least expensive available share class.

SELECT AND CONTRACT WITH SERVICE PROVIDERS

Selecting a service provider is a fiduciary act requiring a documented due diligence process. RFPs may be developed (or other means of testing the market for the qualification, skills, experience needed) to establish that the fee the fiduciary negotiates is reasonable, given the scope of services provided. This obligation doesn’t end when the contract is signed. Fiduciary responsibility requires ongoing monitoring of providers, reviewing of performance, and maintaining continued reasonableness of fees.

Agreements with service providers should be memorialized in contracts. The contract should describe the services to be provided in adequate detail (such as exactly what participant communications the vendor is responsible for preparing and distributing) and the fees. The employer should also negotiate terms, such as the standard of care, indemnifications, insurance, fee disclosure requirements, cybersecurity, and privacy standards. Vendor attempts to limit liability or require indemnification by the employer should be reviewed carefully. The plan itself is prohibited by law from indemnifying fiduciaries against the consequences of a fiduciary breach.

As discussed above, it’s important for the contract to reflect the vendor’s acknowledgment of any allocated fiduciary responsibility and a specific description of the duties constituting fiduciary duties. It’s surprising, and generally ineffective, for a vendor hired to provide fiduciary activities to disclaim such responsibility.

INCORPORATE PLAN TERMS AND GOVERNING RULES INTO A WRITTEN PLAN DOCUMENT

An ERISA plan must be in writing, and failure to operate the plan in accordance with its written terms is a fiduciary breach [ERISA Section 404(a)(1)(D)]. Fiduciaries should maintain copies and be familiar with the plan’s terms. The plan document should detail exactly how the plan operates mechanically—vesting, participation, distributions, plan loans, etc.—and provide specific guidance; for example, whether necessary and reasonable plan expenses may be paid by the plan or instead must be picked up by the employer. The plan’s assets must be held in trust pursuant to a written trust agreement.

FORMALLY ADOPT THE PLAN

Resolutions by a board of directors or other applicable employer governing body provide the authorization for a business to adopt the plan and for officers of the business to take actions required to implement the plan. Any adoption agreement must be signed by an authorized employer representative.

DRAFT PROCEDURAL DOCUMENTS TO PROVIDE FURTHER GUIDANCE

A well-crafted investment policy statement, or IPS, sets out standards, processes, policies, and guidance on the investment of the plan’s assets. The policy should also serve to confirm how responsibilities for selecting, monitoring, and managing plan investments are allocated. Day-to-day administrative procedural manuals or procedures setting out plan practices in administering specific programs, such as plan loans, hardship withdrawals, or qualified domestic relations orders, may also be helpful.

TELL EMPLOYEES ABOUT THE PLAN AND HOW IT WORKS

A user-friendly summary plan description (SPD) is legally required (with penalties for non-compliance) and important for communicating to participants the terms of the plan in understandable language. Additional participant paperwork will be required to launch and operate the plan. Depending on the plan terms, that may include payroll authorization, beneficiary designations, and notices of automatic enrollment.

Summing Everything Up

Good fiduciary practice is based on foundational elements: a solid decision-making structure with well-developed policies and procedures in writing and adhered to with care.

Author : Victoire Auguste-Dormeuil

Contact her through LinkedIn here.

10 Key Things to Consider When Creating an Employee Retirement Plan