by Fred Reish

The first step in reducing fiduciary risk for managing a retirement plan is satisfy the law’s requirements for making decisions about the plan’s investments, service providers and administration. Two recent articles discussed some of those fiduciary issues, and how to avoid problems, regarding plan investments and service providers: How to Reduce Fiduciary Risk: Selection of Mutual Fund Share Classes and Reducing Fiduciary Risk: Recordkeeping Fees, Revenue Sharing, and ERISA Budget Accounts

While compliant fiduciary practices are the first line of defense, more should be done to protect the company, and the officers and members of the plan committee, who make decisions about the operation of the plan.

To be safe in the world of litigation and government investigations, it is important to realize that lawsuits and investigations occur years after decisions are made. The statute of limitations for most fiduciary decisions is six years, which means that claims can be made as long as 6 year after the decision was made and implemented. During that time, memories may have faded and notes and documents may have been discarded. As a result, even where those officers and committee members did a compliant and prudent job, it may be difficult to prove that they did.

When viewed in that way, the importance of maintaining good records is obvious. This article discusses that practice and uses the industry term “fiduciary file” to refer to the maintenance of the records and decisions. The article also lists some of the records that should be kept in the fiduciary file.

To best demonstrate compliant practices, plan fiduciaries—such as committee members—should consider having the following documentation and keeping these materials in the “fiduciary file” for at least six or seven years. Since most plans are managed by plan committees, this article uses “plan committee” to refer to the officers or managers who are responsible for making decisions about a plan’s operations. Those committee members, officers or managers are the plan fiduciaries who are responsible for managing the plan.

  • Agendas for committee meetings. The law does not require that fiduciaries have agendas for their meetings. However, an agenda prepared with the help of an experienced plan adviser can be a roadmap for compliance. It shows that the committee members paid attention to the important issues for operating the plan.
  • Materials reviewed at the meetings. Most advisers and recordkeepers provide reports to plan sponsors. Those reports usually contain information about the plan operations and/or investments. The reports should be reviewed by the committee members before the meeting and discussed at the meeting.
  • Minutes of the meetings. Minutes should be prepared for each meeting and should list the materials reviewed and the decisions made. The minutes should also note that the issues were fully discussed by the committee members and that the members asked questions of their advisers and providers. There is a line of thinking that the minutes should not include any individual comments and should not attribute statements to any committee member. The rationale is that, if there is litigation in the future, the named committee members will be deposed about their statements and possibly be witnesses at trial.
  • The plan’s investment policy statement (IPS). While not legally required, it is considered a “best practice” to have an IPS. A thoughtful and well-drafted IPS can be a roadmap for compliance. However, the failure to follow the IPS can be problematic. As a result, it is a good practice for risk management purposes for the committee members and the plan’s investment adviser to review the IPS at least once a year and to document that in the minutes of the meeting.

What about other materials, for example, the notes taken by committee members? There are pros and cons to retaining those notes. At the least, they should be retained until the committee members have reviewed and approved the minutes of the meeting. But, what about after that? Where a committee member is a good note taker, in the sense of making thorough and complete notations, the notes could be helpful. However, the same cannot be said of scribbles and doodles. Often those cryptic notes are susceptible of different interpretations—some of which would not accurately reflect the thinking of the author, particularly when they are being scrutinized years later. As a result, make sure that the notes in the fiduciary file accurately and completely describe the discussions at the committee meetings.

An experienced plan adviser can be invaluable in this process. For example, the adviser can help draft the agendas for the meetings to ensure that the committee is addressing the important fiduciary issues. In addition, the adviser can provide reports about the plan’s investments and can make recommendations about removing and replacing investments where necessary. The adviser can also provide advice to the plan committee on the share classes of the mutual funds that are available to the plan, as well as the pros and cons of selecting among the different share classes and the role of revenue sharing in making that decision. That discussion should be included in the committee minutes and placed in the fiduciary file. Share class selection is now one of the top fiduciary litigation issues.

Concluding Thoughts

It is important to make prudent fiduciary decisions. It is also important to have proof of the process and materials for making those decisions. That means that there should be “proof” that the right issues were discussed and that the necessary decisions were made…and were made in the right way.

A good starting point is to have regular committee meetings with thoughtful agendas. Most plan committees meet quarterly and well-drafted agendas can ensure that, over the course of a year, the committee members are paying attention to all of the key issues.

The next step is to have reports from the plan’s adviser about the investments, share classes and expenses, and reports about the total compensation of the plan’s service providers, both direct and indirect. The committee should also receive reports from the plan’s recordkeeper about the operations of the plan. Those reports should be reviewed and decisions should be made at the committee meetings. The minutes should show that the agenda items were covered, the reports reviewed, and the decisions made.

The agendas, reports and minutes should be placed in the fiduciary file and retained for at least six years.

It’s important for fiduciaries to satisfy ERISA’s prudent man rule. But it is also important for the committee to be able to prove that it did. That’s what a fiduciary file is for.

This content was authored by Fred Reish. Fred Reish is a partner with the law firm of Faegre Drinker who specializes in retirement law, focusing on fiduciary and best interest standards of care, prohibited transactions, conflicts of interest, and retirement plans.

The views expressed in this article are those of Fred Reish, and not necessarily of Faegre Drinker or HUB International. The article is for general information only and is not intended to provide investment, tax or legal advice, or recommendations for any particular situation. Please consult with a financial, tax or legal advisor on your circumstances.

HUB International’s retirement plan fiduciary advisors provide ongoing guidance on your plan’s setup and management to ensure it meets regulatory compliance guidelines and the interests of your employees. Contact HUB to request an assessment of your organization’s retirement plan.