11 - Plan Governance and Fiduciary Oversight

Question 1

A plan sponsor should establish a formal retirement plan committee that has responsibility regarding the governance and administration of the retirement plan. While this committee may not be responsible for actually performing any of the _________ functions or handling actual participant communication relative to the plan, the committee does delegate that responsibility to an appropriate party and provides _______ to ensure that the proper actions are happening in a timely fashion.

The membership of this committee is generally fairly small: three to five individuals often is sufficient, and membership consists of key _______ of the organization. In a small company, it may consist of the company president and the senior financial and human resources officers. In a larger company, the membership may be the chief financial officer, the human resources vice president, the corporate counsel, plus two other organizational members from senior management.

Answer 1

administrative

oversight

senior leaders

Question 2

The retirement plan committee should be authorized by the corporation with the charge to make all decisions necessary regarding the administration of the retirement plan. This committee determines the plan _______; selects the service providers; meets with legal counsel; and reviews the overall status of the plan. As a committee, they meet at least ______ but probably no more than _______—unless addressing some current, pressing issue.

Answer 2

design

annually

quarterly

Question 3

A key function of the retirement plan committee is the _________ of responsibilities to other parties. This includes internal corporate delegation as well as the delegation of certain plan functions to external service providers such as a plan trustee, recordkeeper, actuary, investment manager and plan consultant.

Although a corporation may hire external entities to provide these services, this does not relieve the plan sponsor of _________ responsibility for these functions. Therefore, it is essential that the retirement plan committee understand clearly what these external service providers will and will not be doing relative to the administration of the plan.

Answer 3

delegation

fiduciary

Question 4

A _________ is a form of protection that covers policyholders for losses that are incurred as a result of fraudulent acts by individuals specified in the bond’s contract. All qualified retirement plans are required to have a one that covers at least ___% of the plan assets in case of loss to the plan because of criminal acts or embezzlement by any of the plan fiduciaries or other plan officials.

The maximum required amount for the is $______ unless the plan holds employer securities, in which case the maximum is increased to $1 million. It often is possible to have one added to the corporation’s existing bond, but care should be taken to ensure that it complies with the ERISA)requirements.

Answer 4

fidelity bond

10%

$500,000

Question 5

The retirement plan committee plays a substantive role in decisions regarding retirement plan design. The actual decision regarding the plan design is typically a key responsibility of the retirement plan committee. While this decision should be made with advice supplied from consultants and legal advisors, it is important for the committee to determine the fit between the choice of various plan features and the unique ________ and ________ issues of the corporation. The initial design of the plan is important, but today more often time is spent regarding ongoing _________ to the plan.

Answer 5

benefit goals

human resource

amendments

Question 6

An amendment to a plan document is a change or modification to the plan document that alters the operation of the plan. Such amendments are often driven by changes in the laws that occur on a continuing basis.

Most companies will use the opportunity presented when amendments are needed to comply with new legal requirements, to reevaluate other features in the plan or to determine if other amendments should be implemented. Drafting, reviewing, implementing and communicating amendments is a ______ process. It not only involves legal costs, but also adds the expense of distributing information to plan participants and changing other employee communications such as policy manuals and company websites.

Sometimes a plan amendment necessitates changes to _____ systems and company procedures. Often an amendment is communicated through issuance of a ______

Answer 6

costly

payroll

summary of material modification (SMM)

Question 7

Often, the effective date for any required change because of new legislation is the _____________ after the legislation is passed by Congress, even though the plan document is not required to be amended for a period of up to two or three years.

New legislation creates two distinct challenges for a plan sponsor:

• First, the plan sponsor must determine what elements of the plan will be altered due to the new legislation.
• Second, the plan must be consistently _______ according to the altered terms of the plan, as it will be after the amendment process has occurred. A plan that ignores operating in a manner as directed by the new legislation until the formal amendment deadline would be found to be out of compliance with the law. Failure to make these plan changes in a timely manner places the plan at risk of being penalized by the Internal Revenue Service (IRS) or the Department of Labor (DOL). Therefore, a ________ should be established that clearly identifies how the plan will operate during this interim period until the plan document has been formally amended.

Answer 7

start of the following plan year

administered

procedure

Question 8

While the plan document provides the formal legal structure and general operating policies of the plan, numerous other procedural elements require more in-depth plan features that need to be addressed that are not detailed in the plan document.

A well-managed plan will have a set of policies and procedures that guide the daily operation of the plan. There are some policies that every plan should have and that should be formally prepared, reviewed and maintained. These include an investment policy; policies regarding participant ______ and ______ distributions, if applicable; and a policy regarding qualified domestic relations orders (QDROs). Some of these policies can be anticipated at the plan’s inception and should be in place at the start of plan operations, such as the _________ policy. Other policies may be determined when a question or unique situation arises.

Answer 8

loans

hardship

investment

Question 9

Does a retirement plan that permits participant-directed investments need an investment policy?

Answer 9

Yes, needed for every type of plan

Question 10

The loan policy is the guiding document that provides answers to many of the administrative issues that arise for plan loans. In addition to stating the statutory limits or plan limits (if different) regarding participant loans, this policy also provides guidance regarding how
certain ______ will be handled. By establishing policies in advance of situations, the staff administering the plan is able to provide consistent answers to questions from plan participants. This minimizes the risk that _________ to one participant over another will occur. Participant loans continue to be an area of scrutiny by IRS during ______, so proper administration is very important.

Answer 10

events

unfair treatment

audits

Question 11

A policy regarding hardship distributions should be in place if the plan permits these types of distributions. While the plan document will establish the minimum requirements regarding what qualifies as a “hardship,” the policy should include the following elements:

1. How frequently are hardship distributions _______ (monthly, quarterly or on an ad hoc basis)?
2. Is there a _______ hardship withdrawal loan amount requirement (e.g., $1,000)?
3. What will be acceptable ______ to establish the hardship, and/or who will make the determination that there is in fact a hardship?
4. What other sources of ______ must a participant have used or attempted to use prior to applying for a hardship distribution?

Answer 11

1. processed
2. minimum
3. proof
4. funds

Question 12

The difference between what is contained in the plan document regarding plan features like loans or hardships and what is contained in the policy document often is confusing.

Generally, the elements within the policy are items that may change over time because of changing aspects of the business, internal procedures or even government regulations. While it is important
to have a consistent policy applied evenly to all participants, it also is important that a plan administrator be able to respond to changing conditions without having to amend the formal plan document frequently.

The policy document serves as the guide for the _______ functions of the plan.

Of course, the actual plan document is the controlling instrument
and any _____ or _______ developed must agree with the terms of the plan document.

Answer 12

day-to-day

policy

procedure

Question 13

How does the use of service providers alter the legal liabilities of the plan administrator?

Answer 13

It does NOT

Question 14

The success of the partnership between plan service providers and plan sponsors depends on the ongoing ________ among the various parties involved in the partnership as well as the quality and timeliness of the services being provided.

The _______ retains ultimate responsibility regarding the legal compliance of the plan as well as ensuring that the participants’ needs are being met by the plan service providers. Therefore, the plan sponsor needs to carefully monitor the actions of the service providers to ensure that the plan is being administered according to the terms of the plan document as well as adhering to the agreed- upon levels of service.

Many companies establish a practice of formally assessing the service providers on a regular basis, such as every three to five years. In some cases, this may only be an internal review, while in other cases the plan sponsor may proceed with a full _______ each time.

Answer 14

communication

plan sponsor

RFP process

Question 15

For defined benefit plans, the impact of any fees is borne by the _________ as they are either paid directly by the plan sponsor from assets outside the plan or paid from plan assets. If paid from plan assets, this effectively results in increased contribution requirements for the plan sponsor since participant benefits are determined by the plan’s formula.

However, for defined contribution plans, if the fees are paid from plan assets, the net effect is to reduce participant benefits. Therefore, the actual structure of the fees for defined contribution plans becomes a ________ issue. In short, plan fees have a detrimental impact on participant and beneficiary benefits in a defined contribution plan.

Answer 15

fiduciary

plan sponsor

Question 16

The following represent typical types of fees that are assessed on mutual funds which are commonly the underlying investments in defined contribution plans (4):

Answer 16

1. Sales charges
2. Managment fees
3. Other fees
4. Rule 12b-1 fees

Question 17

Rule 12b-1 fees.

Mutual funds also may charge what are known as Rule 12b-1 fees, which are ongoing fees paid out of ______. Rule 12b-1 fees may be used to pay commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors, and to pay various service providers to a 401(k) plan pursuant to a bundled service arrangement. They usually range between ____% and ___% of assets annually.

Some mutual funds may be advertised as “no-load” funds. This can mean that there is no front- or back-end load. However, there still may be an incremental 12b-1 fee.

Answer 17

fund assets

0.25% and 1%

Question 18

A __________ fund is a trust fund managed by a bank or trust company that pools investments of 401(k) plans and other similar investors. Each investor has a proportionate interest in the trust fund assets. For example, if a collective investment fund holds $10 million in assets and a participant’s investment in the fund is $10,000, the individual has a 0.1% interest in the fund. Like mutual funds, collective investment funds may have different investment objectives. There are no front- or back-end fees associated with a collective investment fund, but there are _______________ and __________ fees.

Answer 18

collective investment

investment management

administrative

Question 19

_____________ occur when the standard fee charged for a service is greater than the actual cost incurred.

Answer 19

Soft-dollar arrangements

Question 20

Subtransfer agent fees are typically found in a __________ account plan, such as a 401(k) plan. The fees may be structured as a flat dollar amount per participant ($5) or as a small percentage of assets (10 basis points).

Two potential issues arise with this fee.

• First, if it is charged as a percentage of assets, the fee will _______ as the plan assets grow—even though there has been no corresponding increase in services provided to either the plan or the participant.
• The second issue relates to who receives this payment and what services have been provided for this fee. This arrangement often is used to cover the cost of the _______ services.

Answer 20

participant-directed

increase

recordkeeping

Question 21

When two companies sponsoring defined contribution plans decide to merge, several issues must be considered and must be addressed early in the merger process. A primary decision must be made—whether the two plans will be combined or whether both plans will continue to be maintained separately. While it may be easier initially to maintain two plans, in the long term this generally is feasible only if there will be an overall separation of the two ________ rather than the creation of an integrated company.

If the decision is made to maintain two separate plans, it will be necessary to make sure that both plans properly address the treat- ment of employees who ____________, ensuring that the plans give credit for service with either company for _____ purposes.

The plans also need to specify which employees are considered participants in which plans, and if a participant who transfers between the divisions can transfer his or her account from one plan to the other.

Answer 21

workforces

transfer between the two divisions

vesting