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Why every retirement committee needs a custom charter

Thought Leadership on Strategic Human Resources Solutions presented by Sibson Consulting.

retirement committee without a charter is like a ship without a navigator — the crew won’t know where they are going or how to get there. Unfortunately, many retirement committees do not have a charter, and even those that do often find that it fails to provide adequate guidance because it is not specific enough to the organization. In the interest of sound organizational and plan governance, every retirement committee should have a custom charter that provides a framework for meeting its responsibilities.

Consider a company without a charter. During an administration and compliance review the company learns that its defined contribution (DC) plan document calls for a retirement committee with at least six members with varying expertise. Despite that requirement, the only committee in place is an investment committee with three members. Moreover, that investment committee has no formal procedures for reviewing DC plan operations. Having a charter that outlined the needed committee procedures would have enabled the organization to carry out its fiduciary responsibilities for the plan and avoid complications that could arise from non-compliance or lack of due diligence. Potential complications include costly penalties assessed by the Internal Revenue Service and the Department of Labor.

This article explores why every retirement committee needs a custom charter, what that charter should cover and how to establish one.

Why does every retirement committee need a custom charter?

A retirement committee serves as the bedrock on which the organization’s retirement plans are anchored. The committee’s activities focus on aligning the plan design with the organizational objectives of the plan sponsor as well as overseeing plan operations and administrative functions. A charter can help the retirement committee:

  • Understand how the organization’s mission aligns with the retirement plan’s objectives
  • Develop and follow processes that keep the plan on course
  • Exercise due diligence and fulfill, oversee and allocate fiduciary obligations
  • Monitor the plan’s ongoing operations
  • Coordinate all the organization’s retirement plans
  • Understand each member’s roles, duties, responsibilities and accountabilities
  • Document the committee’s actions to avoid potential organizational and fiduciary liability and litigation.

What should the retirement committee charter cover?

A well-written charter should advise the retirement committee of the sponsor’s overall retirement planning philosophy, where the organization’s retirement plan should be heading and what path it should take. It should also provide helpful review milestones and directions for handling situations where something may go wrong.

Moreover, a charter can maximize the retirement plan’s outcomes for both the organization and the plan participants by supporting the organization’s workforce-planning objectives and helping the participants prepare for a financially secure retirement. Finally, a properly constructed charter that becomes part of the committee’s DNA for how it should function can help the committee perform, as well as defend its actions, should that need arise.

Although the following outline is by no means comprehensive, the retirement committee’s charter should provide the committee with guidance on how to:

  • Establish the committee’s authority. The retirement committee charter would stipulate the source of the committee’s authority. This is the entity or individual to which the committee reports. It may be the organization, its board of directors or its CEO.
  • Define the committee’s purpose. The charter would include a mission statement that sets forth the committee’s purpose and goals, which include acting in support of the organization’s retirement plan philosophy and objectives. The committee may also be charged with maintaining the plan’s competitive positioning and considering plan-design alternatives.
  • Determine the committee’s structure. The charter would set the number of committee members (permanent and/or temporary), the length of membership and the procedure for selecting new members. It would note what background and expertise, if any, is required of committee members (e.g., finance, HR and executive) and how new members should be trained for their committee duties. Larger organizations may want to establish separate investment and administration subcommittees, the authority for which needs to be covered in the committee’s charter or in separate subcommittee charters.
  • Formalize the committee’s procedures. The committee’s procedures include setting meeting frequency and agendas. The charter would establish procedures for hearing motions, establishing voting procedures and reviewing reports from delegates, subcommittees (if any), independent advisors and vendors. The committee procedures should communicate the need to document thoroughly what occurs at committee meetings in formal minutes to create a supporting record that demonstrates that the committee has exercised fiduciary due diligence on any actions taken.

Read the full article here.

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About the authors:

Michael O’Malley, a PhD in social psychology and quantitative methods, is a senior vice president and human capital consultant for Sibson Consulting. He has more than 25 years of experience in compensation, performance management, quantitative methods and organizational research, design and effectiveness. He can be reached at 212.251.5444 or momalley@sibson.com.

Demi Farina is an associate human capital consultant for Sibson Consulting with experience in compensation assessment and design, career structures and organizational effectiveness. She can be reached at 919.233.6652 or dfarina@sibson.com.