Here’s a recent conversation that may help shed some light on selecting persons at your organization to serve on your retirement plan oversight committee —It’s actually a hypothetical, but the professionals at Qualified Plan Advisors provide guidance of this nature to clients on a frequent basis.
“Hello, Bill. My HR Director just asked me to explain why our Board Chair cannot serve on the 401(k) committee. I mentioned our prior discussions, along with the conclusion that she would not devote her time to overseeing the retirement plan, which we made last year. But I could use a few reminders about what we discussed.”
“Sarah, I appreciate you calling me about this. Here’s some helpful points:
- Your Board Chair is certainly free to serve on the committee.
- The caution is because your Board of Directors, including the Chair, make choices as to how ABC Construction operates. In the event that a lawsuit is brought by the shareholders, unless a decision is clearly unreasonable under the circumstances, the law will not second guess or attach liability for that corporate decision making. This is generally referred to as the Business Judgement Rule, or “BJR.” And the protection applies to your Board’s fiduciary duties to shareholders and even when a decision may turn out to be a mistake, in hindsight, from that perspective of the shareholders.
- The liability for serving on the 401(k) oversight committee is different. If your Chair serves on this committee, she will have a fiduciary duty to adhere to the legal requirements applied by ERISA. The fiduciary standard is rigorous and has been called the highest known to law by the U.S. Supreme Court.
And here’s the other thing. When she serves on the committee, she must take off her “business hat” and put on her “fiduciary hat,” making decisions that are exclusively in the best interest of the plan’s participants and their beneficiaries, not the business. Many of our executives struggle with the notion of putting on that fiduciary hat, taking the risk that their knowledge of the business would be scrutinized as somehow influencing their decision making on the committee. And that’s disregarding the risk of potential personal liability that ERISA imposes, as you and I have discussed many times.”
“Thanks, Bill. That helps. And I remember the insurance conversation from last year, when you worked through the D&O coverage discussion to confirm that it doesn’t apply to claims for breach of fiduciary duty under ERISA. Our subsequent decision to add the fiduciary liability coverage helped everyone on the committee feel much more comfortable.”
“You’re welcome, Sarah, I’m happy to talk more with the Director, committee members, or you. And if we need to get one of our ERISA attorneys on the phone, I will make that happen.”