We are approaching the time of year where we dust off our employee retirement plans and auditors show up to ask us all sorts of questions about the plan and test a sample of contributions. Once that audit is complete, we can shelve our plan and not dust it off again until the next year. Of course, I am being facetious. However, it sometimes feels this way as nonprofits spend a significant amount of time with governance of the agency, but often not as much attention is paid to governance of the retirement plan even with the significant risks that exist. Sponsoring a qualified employee retirement plan comes with a good deal of responsibility.
With the increased oversight of employee retirement plans, and recent law changes, agencies want to guarantee their plan is compliant. Ensuring compliance starts with the governance procedures an agency has in place. Plan governance is the oversight that is needed to keep the plan compliant. Good governance will give you the framework to help mitigate the risks in these plans. There is nothing scarier than having the Department of Labor show up on your doorstep. Here are some things that nonprofits can do to prepare for such a visit.
1. Establish a retirement plan committee.
Under the Employee Retirement Income Security Act of 1974 (ERISA), plans have a duty to monitor, disclose their activities, diversify investments, and act in accordance with the retirement-plan document. A key component to complying with these ERISA requirements is having a retirement plan committee. The committee used to be considered a best practice, but with the number of lawsuits against sponsors of retirement plans over the last five to 10 years, it has become a must. A retirement plan committee is an effective way to provide the oversight needed to ensure compliance. Members of the committee should have a diverse set of skills and experience and must include representatives from finance and human resources. The committee should meet with the custodians of the plan and legal counsel as necessary. It should also ensure minutes of those meetings are maintained.
The review of investment options and fees is a significant responsibility for the retirement plan committee. Under ERISA, fiduciaries must engage in a prudent process to select and monitor investment options. Additionally, investment fees must be reasonable for the services being provided. Several lawsuits over the last few years have revolved around fees and hidden fees in investments.
2. Create an investment-policy statement.
While having an investment-policy statement is not required, it is a way to provide appropriate guidance over the retirement plan investment portfolio. An investment-policy statement addresses the process for selecting and monitoring investments. Having and following an investment policy statement can significantly reduce fiduciary risk. An investment-policy statement provides a process for selecting and monitoring investment options.
A part of the investment policy should be the establishment of a qualified default investment alternative (QDIA). A QDIA protects plan fiduciaries and can reduce plan fiduciary liability due to participants’ investment losses if QDIA requirements are met, such as notice requirements.
3. Review and understand the plan’s governing documents.
The governing documents provide the terms to be followed and overall direction for operating the employee retirement plan. The plan document contains the provisions of the plan and sets forth key components. The adoption agreement contains the options that the sponsor completes, including the vesting schedules and definition of compensation.
4. Create a governance calendar.
Establishing and following an annual governance calendar ensures the annual items are not missed. Examples of items that should be included in the calendar are a review of vendor fees and services, review of the SOC reports for the vendors, and review of the annual audit and Form 5500 filing.
Providing training to all employees about the various components of the retirement plan, including the investment risks and opportunities, provides participants with the knowledge they need to make informed decisions. This training should be provided annually and be performed by experts hired by the sponsors.
With all the responsibilities on plan sponsors, there has been some relief with the SECURE Act that was passed in 2021. The SECURE Act allows unrelated employers to come together in a Pooled Employer Plan (PEP) that is managed by a pooled plan provider. The pooled plan provider is the fiduciary of the PEP and thus has the administrative burden and risks. The pooled plan provider is responsible for selecting and monitoring vendors, recordkeepers and, best of all, there is only one audit and 5500 filing for the PEP itself. There are plenty of good reasons to consider a PEP for your not-for-profit organization, including lower costs, less risk and responsibilities for the agency, and improved retirement outcomes. Streamlining and delegating retirement-plan administration to experts allows agencies to focus on their core business.
Additional legislation has been proposed, and passed the U.S. House of Representatives, that would require employers to automatically enroll all newly eligible employees at a 3 percent deduction level that ticks up by 1 percent annually until it reaches 10 percent. Employees have the choice to opt out, if they prefer, and existing plans wouldn’t have to change.
With so many changes occurring in the retirement-plan arena, it can be difficult to stay on top of everything. Good governance processes and procedures reduce risks to the sponsor and the likelihood of a plan straying off course.
Bettina Lipphardt is a partner and the team leader in The Bonadio Group’s Healthcare/Tax-Exempt Syracuse/Utica Division. She provides consulting and auditing services for a variety of tax-exempt clients. Contact her at email@example.com