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What You Don't Know Can Hurt You--Manage Risk With Solid Retirement Plan Governance

Article originally published in Benefits Quarterly.

About Lynda Friede About the Author

by Lynda Friede of Principal Financial Group®

Who assumes the risk associated with management of an employer-sponsored retirement plan? Knowing the answer to that question is critical to good retirement plan governance. Not knowing the answer, on the other hand, could create additional risk for the organization and its retirement plan. This article explains why every plan needs good governance and how to get started. It also discusses identifying who does what, creating and documenting processes, and keeping a watchful eye over fiduciaries and nonfiduciary service providers. Together, these steps can provide plan sponsors with more confidence about their retirement plans.

Do you manage a retirement plan or help others who do--either as an employee of your organization or as a financial professional? If so, you need to know the answer to one very important question: Who assumes the risk associated with management of the plan?

Knowing the answer to that question is critical to good retirement plan governance. Not knowing the answer, on the other hand, could create additional risk for you--as well as for your organization and the retirement plan. As outlined in the white paper "Retirement Plan Governance: What is it and why should you care?" at, retirement plan governance can help you manage these risks and help ensure a more successful retirement plan.

Why Every Plan Needs Good Governance

Governance goes beyond fiduciary duties and includes everything involved in the administration and management of the retirement plan. Governance establishes the rules of the road for plan decisions. It's about making decisions—for all aspects of the plan throughout its lifecycle--the right way.

Good retirement plan governance can do more than help manage risk. Following prudent, documented processes also helps meet the objectives of the retirement plan, fulfill the responsibilities of the organization sponsoring the plan and plan fiduciaries, and provide more financial security for employees.

It can also save time in the long run by simplifying decision-making processes. Rather than discussing the same issues repeatedly with no decision-making process in place, good governance makes it easier to make effective decisions. For instance, good governance can streamline the process when:

  • Appointing a new individual or committee member to work with the retirement plan
  • Organizing documentation and putting processes in place in the event of an audit
  • Making decisions by committee

Governance can also help with the issue of accidental fiduciaries--individuals who inadvertently overstep the boundaries of their roles. Governance processes help reduce risk by putting prudent procedures in place for fiduciaries and nonfiduciaries.

How to Get Started

A good place to start is by considering who should help with the administration of the plan and management of plan assets. Some or all of the following people may be involved:

  • Individuals or committees that act on behalf of the employer as plan sponsor. Options could include the board of directors, chief executive officer, senior officers or a leadership committee. Individuals or committees acting on behalf of the employer as plan sponsor are not fiduciaries.
  • Fiduciaries of the plan. This could be the employer, an individual or a committee of individuals.
  • Employees of the employer who carry out ministerial duties. These functions are nondiscretionary in nature and are necessary to carry out the day-to-day operation of the plan. Employees who carry out ministerial duties are not fiduciaries.
  • Service providers. They assist the fiduciaries with various plan functions but typically are not considered fiduciaries themselves.
  • Financial professionals. Financial professionals can play key roles in the operation of a retirement plan. They can serve as resources when making decisions about plan design and the selection of service providers, and they can help with plan governance and compliance. Financial professionals may or may not be fiduciaries, depending on the services they provide.

You may find it necessary or more efficient to ask an individual to serve in multiple roles with respect to the plan. For instance, an individual may have employment responsibilities that relate to making plan design decisions on behalf of the plan sponsor. When acting on behalf of the plan sponsor, the individual is a nonfiduciary. The same individual may also serve as a fiduciary to the plan with responsibility for administering the plan or managing plan assets.

An important consideration when selecting an individual to serve in multiple roles is whether or not the individual is capable of acting in both a fiduciary and nonfiduciary capacity. The individual can act in only one capacity at any time and must understand which role he or she is in when fulfilling assigned duties.

That individual must be very clear about which hat he or she is wearing when specific decisions are made. When acting on behalf of the plan sponsor, the individual will act with the interest of the plan sponsor in mind. However, when acting as a plan fiduciary, the individual must act solely in the interest of participants and beneficiaries.

Identify Who Does What

Even the best governance processes will not be effective if the people involved don't understand their roles and responsibilities in relation to the plan--and accept the limitations of those roles and responsibilities. If you're not sure whether your plan's roles are clearly defined, consider these questions:

  • If you asked everyone involved in the operation of your retirement plan what their duties are, would you get the correct answers?
  • If there were a change in the people providing services to your plan, would the existing documentation allow for new personnel to transition easily into their roles?
  • In the event of an Internal Revenue Service (IRS) or Department of Labor (DOL) audit, could you supply information quickly about who is responsible for doing what?

If the answer to any of those questions is no, it may be a good time for you to review your governance procedures and identify any gaps that may exist. For help identifying the various responsibilities--fiduciary and nonfiduciary--that relate to the operation of a retirement plan, you should review the Internal Revenue Code, the plan document, the trust document, service agreements and committee charters.

When you have the roles defined, make sure each individual involved in the plan understands his or her role and responsibilities, as well as the limitations of the role and responsibilities. Communication should include training to ensure that everyone understands what's expected.

Create--and Document--Processes

Once the roles have been identified and communicated, formal processes should be put in place to make sure the duties are carried out in the right way and by the right people. Developing and maintaining documented processes and procedures will:

  • Help both fiduciaries and nonfiduciaries carry out their responsibilities
  • Assist in keeping your plan in compliance
  • Result in greater efficiency and preparedness in the event of an IRS or DOL plan audit.

For fiduciaries, effective processes and procedures should include regularly scheduled, well-organized meetings with a secretary to record and retain the meeting materials and minutes. Documentation is key to demonstrating procedural prudence.

A few examples of common processes that should be addressed by the named fiduciary of the plan include selecting and monitoring investment options, administering the plan loan program, developing procedures to facilitate administration of the plan and ensuring that plan compliance testing is completed timely. The procedures, once established, will create the framework within which the nonfiduciaries providing services will work.

Keep a Watchful Eye

Simply creating and documenting processes isn't enough for fulfilling fiduciary responsibilities. Fiduciaries must also be monitored to make sure they're performing their duties prudently.

This doesn't mean, of course, that every single action of the named fiduciary and other plan fiduciary must be supervised. It does require, however, an appropriate amount of oversight. The objective is to make sure the fiduciary is acting with the care, skill, prudence and diligence that would be exercised by a prudent person familiar with the matter and acting under similar circumstances. This may include, among other things, periodic meetings with the fiduciary to assess the fiduciary's actions and address any resource or process deficiencies.

Also, fiduciaries who hire nonfiduciary service providers are responsible for monitoring those providers. This includes monitoring performance and cost, as well as possibly benchmarking against other providers. The fiduciary should also monitor activities of nonfiduciary service providers to ensure they aren't exercising discretion over the administration of the plan or management of plan assets.

Feel More Confident About Your Retirement Plan

Retirement plan governance is a dynamic process that requires continued attention--but it also provides continued reward. Knowing that you have the right people and processes in place can help you feel more confident that you are achieving the objectives that caused you to establish your plan in the first place. Considering the constant evolution of retirement plan laws, regulations and court decisions, you should make plan governance review part of your regular routine.

Your plan service provider or financial professional can help you get started with a governance review. This can help you make sure that:

  • The right people are engaged with the retirement plan
  • Retirement plan processes are in place and have been clearly documented
  • Activities are being routinely monitored and changes made as needed.

Finally, keep in mind that retirement plan governance is a flexible concept. Good retirement plan governance must be molded to respond to your organization's objectives, needs, size and available resources, the existing financial and business conditions, and the complexity of your organization's retirement plan.

Author's note: While this communication may be used to promote or market a transaction or idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements.


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