Are your clients following a prudent decision-making process in their 401(k) plan? Do they always put the interests of plan participants first when considering plan issues?
After more than 30 years of working on the 401(k) plans of companies as large as Apple and as small as a new start-up, I have collected the following best practices related to 401(k) plan decision-making and documentation.
Ensure they have a properly structured retirement plan committee
In order to make good decisions for employees, your clients need employee input from across their organization. If they don’t have a committee that meets regularly to discuss 401(k) plan issues, create one. They need one, regardless of how big or small the plan is.
Include on the committee C-level or equivalent personnel. Make sure they have at least three employees on it and an odd number of members (to avoid tie votes). It’s best to have all members from a similar management level. If you cannot achieve that, the higher-level people will end up making all the decisions. For the same reason, try to keep the CEO off the committee.
I suggest calling it the “Retirement Plan Committee” rather than the “Investment Committee.” You have many things to discuss regarding the 401(k) plan and the word “investment” can send the wrong message about the committee’s responsibilities. Larger companies should consider calling their committee a “Retirement Program Committee” because it is likely they have more than one retirement plan.
Discuss the right stuff
Part of a good decision-making process is ensuring that they are discussing the right issues at the right time. The retirement plan committee should be talking about the following items when it meets:
- Provider performance and costs.
- Investment option performance and fees.
- Company and committee member fiduciary responsibilities.
- Employee education and communication.
- Plan design and utilization.
- Employee retirement readiness.
The advisor should lead the retirement plan committee meetings. Try to keep discussion about investment performance to a minimum. Most committees spend at least 75 percent of their time talking about investment performance. That is way too much.
Making sure you have the right investment options is important, but, it should not be all-consuming. Limit changes to the investment menu to once per year, unless there is a compelling reason to make them more frequently. Compelling reasons would include a manager change or problems with the firm offering the investment.
Company hats off, participant hats on
The most challenging decision-making obstacle that committee members face is ensuring they are putting plan participants first. That means setting personal biases and company considerations aside—a difficult, if not impossible task for some committee members.
When I work with retirement plan committees on making particularly difficult decisions, I jokingly ask all members to take off whatever hat they were wearing when they walked through the door and put on their participant hat.
Many committee members find this difficult because they live a corporate existence of trying to please their boss and do what is best for their company. Others just can’t get past certain personal biases. Keep in mind that there will be occasions when a committee will need to make decisions that are in the participant’s best interest and not in the company’s.
Every decision the retirement plan committee makes has to put plan participants first. If you notice that you have some committee members who cannot do that, either due to personal biases or company loyalty, do yourself and them a favor and ask them to leave the committee.
Use a sound decision-making process
This is harder than it sounds. On some issues you may have a committee member who says, “Look, this is obvious to me, let’s not waste a lot of time talking about it. Let’s just vote to do this and move on” before any discussion has taken place.
Make sure your discussions include relevant data, note opposing viewpoints and always put participant interests first. Hire consultants for areas your committee lacks knowledge and make sure you reference your plan documents (e.g., adoption agreement, investment policy statement, etc.). Many times, plan document provisions will channel the decision-making process.
Remember, they cannot pick and choose which plan provisions to follow and which to ignore. Not following plan documents can result in fiduciary breaches and personal liability.
Document the process
Every time you meet to discuss your 401(k) plan, make sure someone is taking minutes. It is not necessary to document everything that’s said. The meeting minutes generally should be no longer than one page.
The minutes should capture the process the committee went through to make a decision, important discussion points, and documentation of the vote.
Take the minutes to the next committee meeting and give members a chance to review. Have them vote on acceptance of the minutes and make any changes. Never throw meeting minutes away. Not only do they document decisions, but they also provide evidence that the committee met.
Any plan communication should also find its way into your plan files. For example, when communicating about the company match, make sure you file your communication pieces.
Not following sound decision-making processes and procedures can result in plan disqualification, fiduciary breaches, lawsuits, and personal liability. Make sure you allow a prudent process to guide your decision-making on all 401(k) plan issues.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Lawton is an award-winning 401k investment adviser with over 30 years of experience. Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to 401k plan sponsors. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at http://www.lawtonrpc.com.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.
