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Overseeing a 401(k) Plan Bound for Retirement Island? Don’t Forget the SPD
Last Updated: June 29, 2023
Overseeing a 401(k) retirement plan is a lot like sailing a boat. The fiduciary committee serves as the crew and the chairperson serves as the captain. The passengers are participants, and the destination is Retirement Island – a beautiful place where it’s always 5 o’clock and each individual’s retirement needs are met. Much like a boat’s crew, it’s the fiduciary committee’s responsibility to help stay on course, regardless of the obstacles faced. Regulatory changes are like unexpected winds, fancy new investment products are like choppy seas, and potential lawsuits are like sharks circling below the waves. Participants are depending on plan fiduciaries to help them reach their destination.
Taking the Time to Map the Course
Unlike a captain at sea, it’s virtually unheard of that a 401(k) committee member is solely devoted to overseeing their plan. Few people start their career with the desire to be on a fiduciary committee, rather they find themselves “voluntold” to join as a function of their new job title. Generally, they are serving in their primary role on a day-to-day basis – like human resources director, chief financial officer, or vice president of people. For instance, if you were on a boat and discovered that the crew could only steer the ship for 10 minutes a day because they had other responsibilities, you would probably start reaching for a life jacket and double-checking the straps.
Now, it’s unrealistic for fiduciaries to spend 40 hours a week, 52 weeks a year exclusively focused on managing their company plan. In fact, in another blog, we only ask committee members to devote six hours to the plan each year. Making the most of the time spent with the plan is critical. Participants deserve the committee’s time and attention.
Mapping the Retirement Plan
If the retirement plan is the boat, then the 401(k) plan document would be the map. A map sets the boundaries for the crew to get from point A to B. While free to travel any which way, they need to be familiar with the map to avoid the dangers of veering off course. Similarly, the plan document is a map for committee members that are set by the Plan Sponsor (a.k.a. the Settlor) and contains the legal constraints the plan operates under based on the chosen plan design. It contains the plan’s terms and conditions, definitions and procedures, and other relevant agreements.
Much like a map, the plan document wasn’t designed for casual reading. While it is imperative fiduciary committee members become familiar with the document, it can often exceed 100 pages long and can be difficult to interpret without a background in ERISA law. Most 401(k) fiduciaries are not expected to walk around with their plan document folded in their back pocket, for the same reason a boat captain doesn’t walk around with a map everywhere they go – because a good captain has a compass.
Rely on the Compass to Stay on Course
It’s certainly easier to carry a compass around than it is a map, and in a pinch, a compass gives the captain an idea of the direction the boat is headed. The Summary Plan Description (SPD) is the compass that helps keeps the 401(k) plan on course. It is a relatively brief overview of the plan’s terms, benefits, and how it works. Typically, an SPD is only 10-20 pages, it is not as comprehensive as the plan document and must be written in plain, understandable language.
It can also help new committee members get caught up to speed quickly so they can confidently participate in meaningful discussions about the plan. It doesn’t serve as a substitute for the official plan document, but a supplement that hits the highlights.
The SPD is also the main vehicle for communicating with participants and beneficiaries about the plan. A copy of the SPD must be distributed to new participants in an existing plan within 90 days of becoming covered by the plan, and a new beneficiary must receive a copy within 90 days of commencing benefits.
Since it is relatively short and easy to read, committee members should review their SPD at least annually to refamiliarize their understanding of plan terms and conditions. Just as you would expect a captain to have a compass handy each time they set sail, a fiduciary should take a copy of the SPD to all committee meetings and refer to it often.
At the end of the day, it’s the fiduciary committee’s responsibility to make decisions solely in the best interest of participants, while operating within the parameters set by the plan sponsor. When the committee is comfortable with the rules, it becomes easier to engage in impactful discussions that may make all the difference. Keeping the SPD close by should help fiduciaries feel better equipped to stay on the course and help get participants to Retirement Island on time.
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The information provided in this presentation is not intended to be legal advice. Neither Pension Consultants, Inc. nor any of its employees engage in the practice of law. If assistance is needed in making legal determinations, counsel in the appropriate jurisdiction should be retained, and Pension Consultants, Inc. may continue to provide consulting services, if needed. Consult a competent professional person for appropriate legal, financial or investment advice.
Pension Consultants, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser, located at 300 S. Campbell Ave., Springfield MO, 65806. For questions or more information contact us at 417.889.4918.
