Recently, we have dealt with an “epidemic” of retirement plans, both very large and very small, that all have the same problem – the lack of a proper fiduciary structure. Why? As with so many personnel and benefits-related programs, new managers and new advisers simply carry on with current and past practices – without looking at the bases for these practices. Unfortunately, when we are asked to look at the fundamentals of a program, we often see that many incorrect assumptions have been made.
Bad assumption #1: You know whom the plan administer is without looking at the plan document. In as many as eight out of ten cases, we see that some individual (e.g., the human resources director) or some group of individuals (e.g., a retirement plan committee) is/are “acting” as the plan administrator of the public agency’s 457(b) or 401(a) plan without knowing what the plan document says. Surprise! Most plan documents usually say that the “employer” is the plan administrator. Many of those documents also say that the employer can designate someone else to serve as the plan administrator. In these cases, you can have a number of problems arise.
First, under the law, the term “employer” generally refers to the organization’s governing body. If you’re a city, your city council could be the 457(b) plan administrator and not even know it! Because most city councils and district boards are ill equipped to be plan administrators, we strongly advise that something be done to change what the plan says or to provide an immediate delegation of the responsibility.
Second, even though you may have a formal retirement committee already in place, it is important to make sure that the committee is properly authorized and appointed in accordance with the plan document. If not, you may have a situation where a group of employees is making important retirement plan administration and investment decisions without authority.
Bad assumption #2: Your retirement committee truly understands its role as the designated plan administrator. You need to have more than a designated plan administrator or administrative committee. There needs to be a clear understanding of the role and responsibilities of designated person(s). Most “plan administrators” are responsible for both the investments of the plan as well as the day-to-day operation and administration of the plan. However, there are numerous instances where it makes sense from either a practical or a legal perspective to separate out these duties. In the public agency context, the identity of the plan administrator can also bear on whether plan administrator meetings are subject to state open meeting laws.
As the saying goes: It is best not to “assume.”