The establishment of prudent processes is a fundamental element of appropriately discharging fiduciary duties under ERISA. Where a committee acts as the primary plan fiduciary, a written committee charter will typically form the basis for all committee operations. The committee charter effectively provides the “by-laws” and operating guidelines that will govern how the committee discharges its obligations.
The Charter’s Role
Charters will typically address how committee members will be appointed and replaced, term limits, quorum, frequency and manner of meeting and voting, formation of subcommittees, recordkeeping, etc. They will also typically address allocation of duties within the committee (e.g., Will there be a chairperson and with what duties? Who will have authority to execute documents on behalf of the committee?) and settlor functions, if any, to be retained by the board or a corporate officer.
Often the plan documents will have provisions governing the activities of appointed committees. Charters must be crafted to supplement, and not conflict, with administrative provisions contained in the actual plan documents. Creation of charters often has the added benefit of forcing the plan fiduciaries to understand the administrative provisions already in the plan documents.
Developing a Committee Charter
In developing a committee charter, care must be taken to avoid creating fiduciary obligations where they are not intended to exist. For example, a charter that requires the committee to seek approval of decisions from the board or suggests that the board has final say on committee decisions may inadvertently undo the planning that went into determining the plan’s named fiduciary.
Ultimately, the charter (as well as the actual plan document) should be developed to reflect how the committee intends to run itself. Which is to say, the charter and plan should conform to the committee’s desired manner of action (within appropriate fiduciary parameters) rather than conforming committee actions to a “template” charter or boilerplate plan provisions.
While some employers have expressed concerns that the creation of a charter creates the opportunity for non-compliance (i.e., it’s just another set of rules the fiduciary could fail to follow), the general consensus is that the value of establishing demonstrable prudent processes outweighs this concern. Committees operating without a charter should consider adopting one and those that already have a charter should periodically review that charter to make sure it isn’t conflict with plan documents or committee practice.