With the economy slowly recovering, HR/benefits managers will turn their attention once again to attracting and retaining the best employees. But attraction and retention of qualified people to serve on defined benefits pension committees has always been a challenge for plan sponsors.
Many times, companies can't find enough people with the necessary expertise to serve on the committee. Or, potential committee members are scared off when they're told they can be held personally liable if they breach their fiduciary responsibilities.
"That is the single issue that scares people from being on the committee. They've heard they're personally responsible and they don't want that," says Gregg Levinson, a principal with Buck Consultants.
Boards of directors sometimes will offer fiduciary indemnification insurance for committee members, but they still are highly exposed.
"The overarching requirement [of a pension committee member] is to understand what it means to be a fiduciary as it relates to the plan," says Lisa Alkon, senior consultant with Towers Watson. "That is critical - that they understand the scope, depth and breadth of their responsibilities and what the liability is associated with that responsibility."
Liability issues aside, effective management of a pension committee starts with a decision on how the committee should be structured. Larger plans often will separate administration and investments, and have separate committees for each function.
"People who are good at administering plans, like HR, are probably not the same people who know that pension funds should be invested in X,Y and Z," says Peter Gold, a principal with Buck Consultants.
"Not only are the skill sets different, but you're only liable under ERISA as a fiduciary for those things for which you have discretionary control. So you wouldn't necessarily want the administrative people to have discretionary control over the investments, and you wouldn't necessarily want the investment people to have control over the administration because why extend their liability?" he adds.
Scope of responsibilities
An administrative committee would be responsible for such things as making sure the plan is being operated in accordance with its terms, that benefits are not being overpaid or underpaid, that the vendors the plan has hired are doing their job, that the plan is communicating to beneficiaries what it needs to communicate and when. It may also be responsible for reviewing claim denials.
An investment committee, meanwhile, would be responsible for such things as selecting and monitoring the investments, making sure there are enough liquid assets in the plan to pay for liabilities as they come due, monitoring the plan's funding level, creating standards for investment managers, and looking at fees associated with the plan.
Regardless of whether an organization separates the administration and investment committees, one of the most important things committee members can do is document what they do and how decisions were reached.
"It's not whether you win or lose, it's how you play the game," says Gold. "You can make a million dollars throwing darts and be imprudent. You can lose a zillion dollars and follow a prudent process. The law requires prudence, not prescience. You don't need to be a fortune teller."
Committee members also need the ability to listen, learn their responsibilities, ask questions and take advice from outside experts.
"The majority of committees do hire outside advisers. A DB committee would hire an actuary, an investment adviser. They may have outside legal advice," says Alkon. "More often than not you'll see outside advisers coming to the committee because they [committee members] can't know everything. And they have day jobs."
Most pension committees will have representation from HR, the business/operating function and the finance or treasury department.
"They can come from any part of the organization as long as they have the desire and ability to learn," says Mary Hobson, executive vice president with EFL Associates. "They have to be in a role where they can take the time and have the inherent ability to learn what they need to learn."
And, says Alkon, they need to be able to separate their day job from their fiduciary role. As soon as they're in a meeting, "they need to understand that from that point on, they're on a fiduciary committee as it relates to the plan and that they're not doing their regular day job."
Committees need to be big enough to get the job done but small enough so that all members have a sense of responsibility.
"I work a lot with public pension plans and they have boards. Some of the boards, by statute, require 14 or 15 people, and that's unwieldy, frankly," says Hobson. "But in order to have enough breadth of representation and thought, you probably need at least five people. If it gets up to nine, 10 or more, it gets hard to schedule meetings and for people to have meaningful input at meetings."
DC oversight
Defined contribution plans aren't immune to the challenges of finding good pension committee members, even though the skills you need to sit on a DC pension committee are somewhat different than for a DB committee, notes Hobson.
"For a DC plan, they're offering investment options that the participant selects, and they need to provide a wide variety of investment options to meet their fiduciary standards under ERISA, but they're not actually making the investments," she says. "Most DC plans mainly offer mutual funds of different kinds, so they're going to be looking at published data that's readily available about all of these funds. I think there's more knowledge required for a DB committee than for a DC committee because they have a broader responsibility and a more in-depth responsibility."
DC plans often rely on the vendor for administrative expertise, and the committee will review the funds and the performance of the vendor. "To the extent that you can delegate some functions, you're only responsible for reviewing the prudence of the delegation," says Gold.
