Corporate Governance vs. Retirement Plan Governance - What's the Difference?
By Debra Stoll, Director-Consulting at the Principal Financial Group®
A lot is written about "corporate" governance and "retirement plan" governance. It can be confusing — especially when it comes to Employee Stock Ownership Plans (ESOPs). ESOPs are unique, and ESOP fiduciaries often serve in multiple roles, which means they can be subject to different legal standards depending on the decisions they are making for the company and the ESOP.
Corporate governance refers to how a company is run, including rights and responsibilities among the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders. Governance provides the framework to pursue objectives and is a way to monitor corporate actions, policies and decisions. It is regulated by state law.
Retirement plan governance refers to how a qualified retirement plan is run, including the roles and responsibilities of plan fiduciaries among the board of directors, plan administrative (sometimes a committee), trustee and investment advisors. It encompasses developing, carrying out and documenting the processes and procedures to operate a qualified retirement plan. It is regulated by ERISA and the Internal Revenue Code.
Who Are Your ESOP Fiduciaries?
For most ESOPs, the company (board of directors), plan administrator (this can be a committee) and trustee are the fiduciaries.
- Is named in the plan document
- Exercises discretionary authority or control over the management or disposition of the plan or its assets
- Provides (or has responsibility to provide) investment advice
- Has discretionary authority or responsibility for plan administration
Those who serve as ESOP fiduciaries and their responsibilities are defined in the ESOP documents (plan, trust agreement, service agreements/contracts, policies and procedures, board resolutions). These vary, depending on what your documents say, so it's important that those making ESOP decisions understand their roles and responsibilities.
What Does an ESOP Fiduciary Do?
Under law, a fiduciary makes discretionary decisions about the plan. See sample Fiduciary Roles and Responsibilities for a general overview of ESOP fiduciaries.
A fiduciary must act solely in the best interests of plan participants, for the exclusive benefit of plan participants, with the care, skill, prudence and diligence of a "prudent expert," in accordance with the terms of the plan (unless the plan provisions would cause a violation of ERISA rules).
Generally, people who carry out purely administrative functions (accountants, attorneys, record keepers, consultants) aren't fiduciaries. However, whether you are an ESOP fiduciary depends on how you act, not just what your title is. You can become a "functional fiduciary" if you take on any of the fiduciary responsibilities under the plan or ERISA even without intending to become a fiduciary.
Developing a formal, written process to document fiduciary decisions can help avoid inadvertent or unintended fiduciary acts and ensure that decisions are carried out consistently and in accordance with the terms of the plan.
Fiduciaries and Conflicts of Interests?
Fiduciaries often wear multiple hats when it comes to corporate/plan governance. Be wary! If you are serving in multiple roles for the company and the ESOP (e.g., CEO, director, CFO, seller, current shareholder, board chair, consultant) different legal standards can apply to your fiduciary decisions. It's important to understand your duties to ESOP participants and the company. Here, again, education, proper governance procedures and documentation are extremely important.
The rules, roles and responsibilities of ESOP fiduciaries warrant education and guidance from experts. Equally important is educating the day-to-day non-fiduciaries who work with plan so they are not inadvertently making "fiduciary" decisions and becoming functional fiduciaries. Let us help you prepare a fiduciary chart and develop good governance principles and procedures. Good governance helps reduce the risks associated with sponsoring an ESOP.