Preventing Pitfalls: Why Plan Governance Is Essential
Early this year InvestmentNews published an article titled, "401(k) Settlements Went Way Up in 2023." The article highlights how 401(k) participant-driven lawsuits are on the rise, and employers are facing heightened scrutiny over the way they manage their retirement plans. In today’s continually evolving regulatory and legal environment, it’s more important than ever to make sure your organization’s retirement plan is both effective and compliant. A well-structured retirement plan governance program can help you pursue these goals when aiming to limit fiduciary risk and improve plan performance. This is especially the case for small retirement plans (under 120 participants), which are not required to follow governance procedures of larger employers, like conducting annual certified audits, and regular due diligence committees.
What Is Retirement Plan Governance?
Simply defined, governance outlines the processes and policies for managing a retirement plan as well as the roles and responsibilities of everyone involved. It provides a framework for effective decision-making on all aspects of the plan, from plan documents and investments to operations and financial reporting.
Why Is Plan Governance Important to the Business?
The stronger your governance, the stronger your plan. An effective governance program details processes, roles and responsibilities for all parties involved in managing the plan and helping support its objectives. It should address how duties are delegated and to whom, and the documentation and oversight of all responsible parties to the plan.
Why Is Plan Governance Important to Plan Trustees and iduciaries?
Did you know plan fiduciaries have exposure to personal liability? Fiduciaries are at personal risk for actions and decisions made on behalf of the plan and its participants. A comprehensive governance process offers several key benefits to plan fiduciaries:
- Mitigation of Legal Risks: Good governance helps identify and correct potential issues that could lead to legal challenges. It can reduce the likelihood of lawsuits related to fiduciary breaches or compliance failures.
- Transparency and Accountability: A transparent governance process enhances trust among plan participants, as they can see that their interests are being safeguarded diligently.
- Improved Participant Outcomes: Effective governance contributes to better management of plan assets, leading to potentially higher returns and lower fees for participants, which can improve their overall retirement outcomes.
What Can You Do About It?
Governance best practices include documenting every aspect of the plan’s day-to-day management, along with long-term operating procedures, such as:
- Activities of a retirement plan committee, with ongoing documentation of meeting minutes.
- Review of plan documents containing key provisions such as eligibility, benefits and distribution policies.
- Investment management and monitoring procedures, along with documentation of how the plan’s investment menu fits the plan’s goals.
- Compliance monitoring and responsibilities.
- Annual plan review and reporting criteria and Annual plan review and reporting criteria and documentation of related activities.
Of course, all of this documentation must be updated and maintained on an ongoing basis.
Wrapping It Up
Straightforward retirement plan governance guidelines and best practices help ensure the retirement plan is compliant and that fiduciaries can confidently and successfully fulfill their responsibilities. Moreover, having carefully documented plan governance procedures can assist you in preparing for and managing plan audits and compliance reviews, increasing your plan’s efficiency and improving your participants’ experience.
To recap, an effective governance program:
- Makes decision-making less complex.
- Reduces risk exposure for the plan and its fiduciaries.
- Supports plan and participant objectives.
- Seeks to improve financial controls.
While governance programs are typically established when the plan is adopted, it’s never too late to develop or update governance procedures. Keep in mind, an effective governance program provides a carefully documented record of the plan fiduciaries’ efforts to manage and maintain the plan prudently in the best interests of its participants and their beneficiaries. Doing so helps all parties clearly understand and carry out their roles and responsibilities, and it helps manage their fiduciary liability.
Is it time to review your plan governance program? For small business, now is the time to meet with your CPA and advisors to update your retirement plan. While the business climate has its challenges, there are many opportunities to take your business to the next level. Every business is unique and there are strategies that can set business owners up for long term success. We're here to help you implement a plan that’s right for you.
Contact us today for a comprehensive evaluation of your governance processes and policies.
Victor Hicks II, CFP®, AIF® is a Wealth Advisor at Perigon Wealth Management LLC. Since 1995, he has specialized in workplace retirement plans for small business. Victor has advised clients on issues related to plan design, employee education, investments and fiduciary compliance.
Want to learn more about 401(k) plans and other workplace retirement strategies?
Contact Victor directly at: Victor.Hicks@PerigonWealth.com| 248.936.9380
PERIGON WEALTH MANAGEMENT LLC, 2000 Town Center, Ste. 1825, Southfield, MI 48075
IMPORTANT: Perigon Wealth Management, LLC (“Perigon”) is a Registered Investment Advisor (“RIA”), located in the State of California. Perigon provides investment advisory and related services for clients nationally. Perigon will maintain all applicable registration and licenses as required by the various states in which Perigon conducts business, as applicable. Perigon renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.