United States

Drafting plan policies and charters

Top 10 ways to reduce your fiduciary liability #5


The issue of documentation is critical for ERISA plans and follows a simple rule of thumb: If it’s not documented, it’s not done.

There are several documents under the category of policies and charters, including the following two critical documents:

  • Retirement plan committee charter: This is a formal document used to delegate responsibility from the named fiduciary to the appropriate co-fiduciaries. All plan documents must name a plan sponsor (also called a named fiduciary or plan administrator); the most frequent default used is “the Company.” Courts interpret this to mean the company’s main decision-making entity. In a C corporation, this would be the board of directors, which means that board members, who are also considered fiduciaries, would be responsible for all the day-to-day plan decisions and management that are made by the committee.

When learning of this responsibility most board members wish to delegate this responsibility. This can only be done via a formal document such as a committee charter. As with any fiduciary delegation, the primary plan fiduciary can delegate all their responsibilities, with the exception of prudently selecting co-fiduciaries and monitoring them periodically.

ERISA takes this documentation issue quite seriously, to the point where if a fiduciary were to resign and not sign and date a resignation, ERISA still considers that individual a fiduciary (assuming he or she remains employed by the sponsoring company).

  • Investment policy statement: Even though ERISA does not require a plan to have an investment policy, having one is a best practice. DOL guidance issued in a 2008 bulletin clarifies that, in the opinion of the DOL, fiduciaries should maintain plan investments in accordance with an investment policy.

An investment policy statement is a written statement that provides the fiduciaries who are responsible for plan investments with general instructions and the documentation process for making investment management decisions, such as when to place an investment option on a watch list or remove it entirely. A well-designed IPS is neither too restrictive nor too vague. As seen in recent litigation in ABB vs. Tussey, its more than $36M award against fiduciaries was partly the result of a too-constrictively worded IPS that was not followed to the letter.

When an investment advisor is hired, the plan would be well served to require, as a condition of employment, that the investment manager or co-fiduciary advisor comply with the terms of the plan’s investment policy and its prescribed process.

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