Plan governance: Is your plan in shape?

Photo of two women reviewing the retirement plan for their company.

Summer is approaching, and for many people thoughts turn to spring cleaning and getting homes, bodies, and finances into top-top shape. A common theme throughout many of these programs is the holistic tracking of diet, physical activity, savings and spending. This tracking reminds us of the ancient Chinese proverb, “The palest ink is better than the best memory.” It is true that it can be best to track and document throughout the day than to trust your memory and record thoughts at day’s end (we all know that the brain has a way of forgetting some of these minor details, such as that chocolate-covered afternoon snack).

The same can be said for running a successful retirement plan. It is important to have goals in place and to document your progress throughout the life of the plan. We refer to this as “plan governance”. 

Plan governance is a broad concept that includes establishing roles, processes, procedures, and documentation to guide all parties in the establishment and administration of the retirement plan and management of plan assets. Just like a physical fitness or a diet plan, there is no perfect governance formula or structure that works best for every plan. However, there are 6 key elements that may help you create a successful retirement plan and encourage positive outcomes for participants:

1. Governance structure.

A clearly delineated fiduciary structure and appointment procedures is needed to define who has responsibilities for the operation of the retirement plan and management of plan assets. Determining the fiduciary structure involves several considerations relating to the identity and responsibilities of the named fiduciary. For smaller organizations a single individual may be responsible, while for larger organizations 1 or more committees may have responsibilities.

2. Understanding responsibilities.

Once the governance structure is defined, understanding of responsibilities is needed to ensure individuals are effective in their roles. It is a good idea to inventory the duties and responsibilities of the retirement plan committee, other fiduciaries, and other non-fiduciaries.

3. Operational structure.

Established well-document policies and procedures help ensure a plan is managed prudently and operates closely to its created process. Documentation of a prudent process can be a fiduciary’s best friend in the event of litigation. In addition, internal controls are essential to help ensure plan operations are complete and accurate. 

4. Investments and fees.

Fiduciaries should engage in a prudent process to select and monitor investment options. In addition, fees must be reasonable for the services being provided. These decisions should be documented, for example in meeting minutes. It is better to take meeting minutes and retain key documents to provide documentation of the prudent process and decisions made than to rely on memory alone. This can be especially true in smaller organizations who do not have retirement plan committees to make decisions. Once a person is no longer a part of the organization, their information is gone with them. 

5. Participant communication and education.

In addition to required notices, effective employee education can be critical to the success of a retirement plan. Greater knowledge should drive better decision-making and improved retirement outcomes for participants.

6. Risk mitigation strategies.

Given that the consequences of a fiduciary breach can be significant, risk mitigation techniques are essential to maintaining a successful retirement plan. Risk mitigation strategies (such as following an investment policy statement) reduce the likelihood of a fiduciary breach or operational error and assist fiduciaries in their compliance with the standards of conduct for ERISA fiduciaries.

By writing down the key elements of good governance, it is much easier to stay on track and have a successfully managed retirement plan. These successes can help the plan reach positive outcomes and the avoidance or reduction of litigation risk as well as a better chance of prevailing in the event of litigation or regulatory inquires. 

Interested in learning more about these 6 topics? We can help

Principal® is committed to helping you and your participants be successful, including providing the fiduciary support you need. Learn more about how to create a sound governance structure in our guide to good governance (PDF). And be sure to check out our helpful 8 mitigation strategies.

If you have any questions about your plan, please contact your financial professional or Principal representative.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, IA 50392.