Strong plan governance is important in ensuring defined contribution plans operate smoothly and effectively. The four key parts of plan governance include:
The most common type of plan oversight is a Plan Board or Committee. Boards are responsible for the DC plan and typically are composed of five to nine members. Boards should meet on a regular basis to review plan documents and administrative procedures. Board meetings should be documented in the form of minutes and thorough reports which make clear the basis for all decision-making.
Outside expertise, in the form of plan consultants or investment advisors, is often utilized by Boards to get advice on administrative best practices and investments. In addition, some plans make use of internal or external legal counsel to ensure the Plan is in compliance with state and federal laws.
Regardless of the plan's size, it is critical that plan documents detail who is responsible for the plan and who is granted the authority to make decisions for the plan.
2. Fiduciary Responsibility
Fiduciary responsibility can be confusing and/or intimidating for those responsible for overseeing the plan. Using best practices and safeguards will help ensure that a fiduciary is protected against liability and makes informed decisions in the best interests of plan participants.
Individuals/entities are considered to be acting in a fiduciary capacity if they:
- Exercise discretion with respect to the management of the plan or its assets
- Have discretionary authority or responsibility in the administration of the plan
- Provide investment advice for compensation
Fiduciary responsibility is a matter first and foremost of function, rather than role. Those individuals who exercise fiduciary direction, whether frequently or infrequently, should be aware of their responsibilities and receive training in this area. NAGDCA has an excellent Fiduciary Education Resource Center to assist plan sponsors in learning more about this topic.
3. Plan Documents
A written plan document serves as a blueprint for your plan, mapping out the offerings and operational procedures that govern it. Although this is not required for non-qualified plans, the IRS approves plan documents for plans that are in compliance with IRS code. Approval can be given for an individually-designed plan, wherein an employer has written its own plan document, or by volume submitter letter, wherein a provider drafts one document for the many plans that utilize the same model. Preparation and submission fees are required if a plan wishes to submit its plan document for IRS review.
It is important to ensure the plan document remains up-to-date with current IRS Code, Treasury regulations and plan provisions. It's a good idea to retain old versions of the plan document for at least six years, as well as signed contracts with providers that show any updates or amendments to the plan. It's also recommended that participant records are held until the individual account has been totally depleted, whether by transfer or benefits payments.
4. Optional Documents
While the plan document is a tax code requirement, there are several other optional documents that may be helpful in operating a plan.
- By-Laws for Charter Documents and Boards/Committees – to clearly outline items involved in the governance of the plan and procedural responsibilities for governing entities
- Policy Manual – operational guide on how to and who is responsible for carrying out administrative policies
- Investment Policy Statement – summary of Plan investment option design, investment option qualifications, selection and removal policies, and review/monitoring responsibilities.
For more information regarding Plan Governance and other Best Practices, check out NAGDCA's Best Practices Guide at NAGDCA.org.
Published April 2014.
Neither NAGDCA, nor its employees or agents, nor members of its Executive Board, provide tax, financial, accounting or legal advice. This memorandum should not be construed as tax, financial, accounting or legal advice; it is provided solely for informational purposes. NAGDCA members, both government and industry, are urged to consult with their own attorneys and/or tax advisors about the issues addressed herein.