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Are you following a prudent decision-making process in your 401k plan? Do you always put the interests of plan participants first when considering plan issues?

After more than 30 years of working on the 401k plans of companies as large as Apple and as small as a new start-up, I have collected the following best practices related to 401k plan decision-making and documentation.
 

Decision-Making And Documentation Best Practices

 

Ensure you have a properly structured retirement plan committee

In order to make good decisions for your employees, you need employee input from across your organization. If you don’t have a committee that meets regularly to discuss 401k plan issues, create one. You need one, regardless of how big or small your plan is.

Include on your committee C-level or equivalent personnel. Make sure you have at least three employees on it and an odd number of members (to avoid tie votes). It’s best to have all of your members from a similar management level. If you cannot achieve that, the higher-level people will end up making all the decisions. For the same reason, try to keep your CEO off your committee.

I suggest calling it the “Retirement Plan Committee” rather than the “Investment Committee.” You have many things to discuss regarding your 401k plan and the word “investment” can send the wrong message about the committee’s responsibilities. Larger companies should consider calling their committee a “Retirement Program Committee” because it is likely they have more than one retirement plan.

Discuss the right stuff

Part of a good decision-making process is ensuring that you are discussing the right issues at the right time. Your retirement plan committee should be talking about the following items when it meets:

  • Provider performance and costs.
  • Investment option performance and fees.
  • Company and committee member fiduciary responsibilities.
  • Employee education and communication.
  • Plan design and utilization.
  • Employee retirement readiness.

Your investment adviser should lead your retirement plan committee meetings. Try to keep discussion about investment performance to a minimum. There is nothing you can do about it. Most committees spend at least 75% of their time talking about investment performance. That is way too much.

Making sure you have the right investment options is important, but, it should not be all-consuming. Limit changes to the investment menu to once per year, unless there is a compelling reason to make them more frequently. Compelling reasons would include a manager change or problems with the firm offering the investment.

Try to confine investment performance discussions to 25% of your total meeting time. You have a lot of other items to discuss!

Company hats off, participant hats on

The most challenging decision-making obstacle that committee members face is ensuring they are putting plan participants first. That means setting personal biases and company considerations aside — a difficult, if not impossible task for some committee members.

When I work with retirement plan committees on making particularly difficult decisions, I jokingly ask all members to take off whatever hat they were wearing when they walked through the door and put on their participant hat.

Many committee members find this difficult because they live a corporate existence of trying to please their boss and do what is best for their company. Others just can’t get past certain personal biases. Keep in mind that there will be occasions when your committee will need to make decisions that are in the participant’s best interest and not in the company’s.

Every decision your retirement plan committee makes has to put plan participants first. If you notice that you have some committee members who cannot do that, either due to personal biases or company loyalty, do yourself and them a favor and ask them to leave your committee.

Use a sound decision-making process

This is harder than it sounds. On some issues you may have a committee member who says, “Look, this is obvious to me, let’s not waste a lot of time talking about it. Let’s just vote to do this and move on” before any discussion has taken place.

Make sure your discussions include relevant data, note opposing viewpoints and always put participant interests first. Hire consultants for areas your committee lacks knowledge and make sure you reference your plan documents (e.g., adoption agreement, investment policy statement, etc.). Many times plan document provisions will channel your decision-making process.

Remember, you cannot pick and choose which plan provisions to follow and which to ignore. Not following your plan documents can result in fiduciary breaches and personal liability.

Document your process

Every time you meet to discuss your 401k plan, make sure someone is taking minutes. It is not necessary to document everything that is said. Your meeting minutes generally should be no longer than one page.

Your minutes should capture the process the committee went through to make a decision, important discussion points, and documentation of the vote.

For example, with regard to hiring a new investment adviser, meeting minutes could include the following:

“The committee discussed replacement of the existing investment adviser. Results of the RFP were reviewed and Investment Adviser A appeared to committee members to be much better than all others because of… The committee voted 7-0 to hire Investment Adviser A, with Don abstaining from the vote due to a conflict.”

Take the minutes to your next committee meeting and give members a chance to review them. Vote on acceptance of the minutes and make any changes. File minutes in your plan file. I suggest never throwing meeting minutes away. Not only do they document decisions, but they also provide evidence that the committee met.

Any plan communication should also find its way into your plan files. For example, when communicating about the company match, make sure you file your communication pieces.

Not following sound decision-making processes and procedures can result in plan disqualification, fiduciary breaches, lawsuits, and personal liability. Make sure you allow a prudent process to guide your decision-making on all 401k plan issues.

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About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs, and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.