The Advisors' Blog

This recent Fenwick alert discusses considerations when establishing a new 401(k) plan. I almost missed this one — with our focus on executive and director compensation, we don’t often highlight complications with widely available plans unless we’re discussing something specific to executives, like NEO compensation disclosures. But this alert has a detailed discussion on shielding the compensation committee from liability that warrants some attention here.

It recommends that companies avoid delegating responsibilities for the 401(k) plan to the compensation committee. Instead, a 401(k) plan committee should be established, and individuals with appropriate experience and sufficient time to handle day-to-day administration should serve on that committee. Here are specific considerations from the alert related to that practice:

– Ensure that the compensation committee charter, the board resolutions and the 401(k) plan documentation do not name the compensation committee as the plan administrator or charge it with responsibility for either performing fiduciary functions and/or delegating fiduciary responsibility to individuals and/or a committee appointed by the compensation committee. Empowering the compensation committee with fiduciary oversight responsibilities with respect to a 401(k) plan can potentially result in the entire board and its members being held personally liable as ERISA co-fiduciaries in the event of a 401(k) plan litigation.

– The entire board should retain sole responsibility to appoint and remove 401(k) plan committee members. This responsibility should not sit with the compensation committee. The board’s fiduciary responsibilities should be limited to this function and high-level monitoring of the actions taken by the 401(k) plan committee in fulfillment of the 401(k) plan committee’s duties. The board’s non-fiduciary responsibilities should be limited to making decisions from a business perspective, such as concerning plan design and the budget allocated to the plan.

– Ensure that the various plan documents that address the delegation of fiduciary responsibility are clear and consistent. Inconsistent documentation can result in co-fiduciary liability of the board and/or its members for the actions or inactions of other plan fiduciaries.

Beyond the board’s role, the alert also makes some helpful suggestions regarding the composition of the 401(k) committee, the frequency of meetings, involvement/observation by in-house counsel, indemnification and insurance coverage.

– Meredith Ervine