Pension
Trends Volume VIII, No. 2, May 2007
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Pension
Trends Volume VIII, No. 2, May 2007
Download/view PDF version
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In this issue...
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Good Plan Management - Part I
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Author Profile |
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Alan J. Stonewall |
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The key to good plan management is understanding the roles of the various parties involved with the plan. Here is a primer on who they are and what their primary responsibilities are.
Plan Sponsor The plan sponsor
is the business entity that establishes and maintains the plan. The plan sponsor
decides on the terms of the plan and is responsible for maintaining its
qualified status, including funding it properly. The plan sponsor has the
authority to amend or terminate the plan, and is responsible for filing the
annual Form 5500 and meeting other reporting and disclosure requirements for the
plan.
Plan Administrator The Plan
Administrator is responsible for administering the plan in accordance with the
terms of the plan document and in accordance with applicable laws and
regulations. The Plan Administrator may hire outside experts like Independent
Actuaries, Inc. (IAI) to perform some of its duties, but that does not make IAI
the Plan Administrator.
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It is not unusual for the owner of a business to act both as
Plan Administrator and Trustee of the plan his or her business sponsors.
There are good reasons for following this practice, including cost savings.
There are also potential pitfalls when the business owner makes decisions
while wearing multiple hats. For example, when discharging duties as the
Trustee, the business owner should be acting in the best interests of the
plan, not the business. There are, in fact, rules that prohibit a Trustee
from using plan assets for the benefit of the plan sponsor. Other business owners are willing to pay a bank and other professionals to carry out many of the responsibilities for managing a plan in order to ensure proper management, or to insulate the business owner from potential liability, or free up time for the owner to focus on the success of the business. |
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The
Plan Administrator is a named fiduciary who can be held accountable under the
pension laws for failing to discharge its duties properly. Most small businesses
name the plan sponsor as the Plan Administrator. Some larger businesses appoint
a committee of employees to serve as the Plan Administrator.
Trustee Like the Plan
Administrator, the Trustee is appointed by the plan sponsor. Many small
businesses appoint one or more of the owners of the business to be the Trustee.
Some small businesses, and many larger ones, hire an institutional Trustee such
as a bank or trust company.
The Trustee is responsible for the investment and safekeeping of the plan
assets. The Trustee may be given discretion to manage the plan assets or may be
directed to follow the instructions of an investment manager. Also, like a Plan
Administrator, the Trustee is a fiduciary who must carry out his or her duties
in accordance with prescribed rules and regulations.
Investment Advisor A plan
sponsor, or in some cases the Trustee, may hire an investment advisor to manage
the investment of the plan assets. In this role, the investment advisor will
follow the guidelines set out in the plans investment policy statement. The
investment policy statement may allow the investment advisor broad discretion as
to what classes of assets are used, and how funds are allocated among the
various asset classes.
In some cases, the plan sponsor may act as his or her own investment advisor.
Most plan sponsors rely upon some type of investment expert for help with
investment decisions even if the investment expert is not formally named as the
investment advisor to the plan.
Third Party Administrator (TPA)
Most plan sponsors, small and large, hire a third party administrator to carry
out many of the annual administrative activities of the plan. The pension laws
and regulations are simply too complex, and the penalties for non-compliance too
severe, for most plan sponsors to try do-it-yourself plan administration.
The range of services provided by a TPA can vary substantially, as can fees. IAI
acts as a third party administrator — and for defined benefit plans, the plan
actuary — for several hundred retirement plans.
Other Professional Advisors In
addition to the parties already described, a plan sponsor is likely to need the
advice and counsel of other professionals. A retirement plan is a legal document
that requires the guidance and opinion of legal counsel. The operation of a
retirement plan regularly involves legal interpretations. There are attorneys
whose practices are almost entirely focused on retirement plans.
The plan sponsors CPA or other accounting advisor often helps with the
accounting and reporting of plan asset activity and employer data needed to
administer the plan. If a plan reaches a certain size or invests in certain
kinds of assets, a CPA firm will be called on to conduct an audit of the plan.
Finally, an Enrolled Actuary must be retained for a defined benefit plan to
determine the annual funding obligation for the plan and attest to its funded
status on Schedule B that is attached to the annual Form 5500 filing.
In the next Pension Trends we will offer some suggestions for attaining a
smooth coordination of activities among all these various parties. It is not
hard to have a well managed retirement plan, but it doesn't happen
automatically.
Beginning of Article | Table of Contents
This newsletter has been published in order to share general
information with our professional contacts. The information presented in this
newsletter should not be acted upon without first seeking the advice of a CPA,
attorney or other benefit professional.
Pension Trends, Volume
VIII, No. 2, May 2007
Copyright © 2007 Independent Actuaries, Inc.