Fiduciary Governance Structure
Fundamental plan design issues, all too frequently over-looked when the plan is established, are the questions of who are the fiduciaries and how should they govern themselves in exercising the discretionary authority and control delegated to them.
Implicit in the process of naming the plan’s fiduciaries, is the creation of a fiduciary governance structure. ERISA Fiduciary Administrators LLC (“EFA”) helps the plan sponsor optimize the fiduciary governance structure. During the “due diligence” phase of a standard engagement we identify the persons and entities who are, wittingly or unwittingly, currently plan fiduciaries because they have been designated as a fiduciary or are functioning in that capacity. EFA will assist the plan sponsor in determining whether these fiduciaries are the right ones and, if not, finding and appointing appropriate replacements. We then advise the plan sponsor regarding the optimal governance structure, while also evaluating the proper levels of fiduciary liability insurance coverage and scope of corporate indemnifications.
Of course, this is not just a question of identifying the fiduciaries and their qualifications, but how they are expected to function and interact. The simplest form of fiduciary governance structure, but also the one that makes the least business sense, is to seat all fiduciary responsibility in the plan sponsor’s Board of Directors. It is not unusual for a plan document to designate the Board as the Named Fiduciary and the Plan Administrator.
Competence to act as a fiduciary means more than just having subject matter expertise. It also means having the time needed to devote to the fiduciary role. Putting aside the potential conflicts of interest that a director would face in switching hats from corporate director to plan fiduciary, even a director with the requisite expertise to act as a fiduciary, typically lacks the time (and probably the inclination) to perform more than an oversight role. The Board should never be left in the position of acting as the Plan Administrator. Unfortunately, this is precisely the form of fiduciary governance structure that is in place with the overwhelming majority of employer sponsored plans.
What is a better governance structure? For starters, of course, the Board could amend the Plan to identify a different party to act as the Plan Administrator. Alternatively, it could delegate the day-to-day fiduciary responsibility of the Plan Administrator to one or more corporate officers who are qualified and willing to accept such a delegation. In either case, the Board would retain the ultimate, but more remote, fiduciary responsibility of periodically monitoring the delegate’s performance, but would not be exposed to liability based on the party’s actions or failures to act. Such a structure might work well in a relatively small plan setting.
In a more optimal governance structure, the Board would amend the Plan to designate a Fiduciary Governance Committee composed of three or more corporate officers to act as Named Fiduciary and Plan Administrator. In one scenario the Fiduciary Governance Committee would perform all the fiduciary roles. Alternatively, the committee could allocate its fiduciary responsibility along basic functional lines, e.g. creating a Plan Administration Sub-committee and an Investment Sub-committee, with mutually exclusive areas of discretionary authority and control. As a third proposition, the Board, the committee, or one of its sub-committees, could engage an independent fiduciary to act as the Plan Administrator, retaining its oversight responsibility only.