To break down how leadership may impact ERISA plan administration, its key to look at leadership styles and who may be deemed a fiduciary.
Many companies and nonprofits appoint as plan fiduciaries or individuals with responsibility to handle the plan, such as account holders, board officers and board leaders. But, just as leading a board is quite different from leading a company, board leadership and vision setting may be quite different from running a plan. Given that these two aims may point to totally divergent directions, focusing on board leadership styles and how that might impact interaction with a financial advisor to a plan could make synchronizing those two aims a little easier. Here’s a review of board leadership styles and key points of a fiduciary’s responsibilities under ERISA.
The Charismatic leadership style is perhaps the easiest leadership style to identify. Charismatic leaders influence others through the power of their personality, and motivate others through their energy. While they aren’t always ranked highly in terms of team focus (over focus on themselves as an individual) they do inspire passion in their groups. These leaders are great at increasing morale among workers. However, this kind of passion and energy can sometimes lead to the organization taking on too much risk.
The Innovative leadership style is defined by problem-solving. These leaders look for roadblocks to a company’s growth and create work environments where others can innovate and develop new approaches. This style is team focused, unlike the charismatic leadership style, to a high degree and focuses on respect for each member of the team. Because of the team focus, however, risk is shared by the group.
A more goal focused approach to leadership is one where the leader acts as Commander in chief, sometimes referred to as a coercive leadership style. They focus on goals and set rules for the team to achieve those goals. In this style, decisions are made only by the Commander and immediate implementation is expected. This style works well in critical situations, including financial or legal, and where real, inflexible deadlines exist.
On the opposite side of the spectrum, some leaders use a more open ended, Overseer approach, this leadership style is sometimes compared to the Authoritarian leadership style, in that it focuses on where work falls into the bigger picture. This type of leader inspires others to create and produce, with input and support from her. A kind of service-leadership model, the Overseer monitors performance, sees the overall picture but does not get into a hands on mode. This style works well for teams that are already functioning at a high level and can be more cost-effective by reducing the number of team meetings and overhead.
The Situational leadership style is also a flexible approach to leading; situational leadership occurs where a leader adapts their style to the team, and focuses on moving the team forward. This leadership style is sometimes referred to as a coaching style; it works well when business processes need an overhaul to work effectively. In essence, the Situational leader looks to both the needs and strengths of the team and makes course corrections as she goes.
Finally, there is the recent darling of leadership and management discussion: the Servant leader, some might also define this leadership style as affiliative – where emotions of team members are given a priority. Hallmarks of the Servant leader include putting the team ahead of his own self-interest, collecting feedback from team members and drafting action plans based on that feedback, and most importantly, noting the success of the team, not the leader. This leadership style often leads to high moral and employee satisfaction, but can be ill-suited to situations requiring fast action or immovable deadlines.
Other kinds of leadership styles, including the pacesetter style, may not impact plans as those leadership styles focus more on the speed of attaining goals, and less on workplace culture. Additionally, most leaders should be able to transition between leadership styles based on the needs of the organization, but not all leaders can master all leadership styles.
To break down how leadership styles may impact ERISA plan administration, its key to look again at who may be deemed a fiduciary (under the rules in place as of November 2017): anyone is a fiduciary under the ERISA rules if they exercise discretionary authority or control over the administration of the plan or the disposition of the plans assets or can be paid for investment advice about the plan’s assets.
Some leaders, including those in nonprofits, may want to change a plan’s guidelines to limit investments in certain kinds of businesses. While some may think this includes only the major targets like guns and tobacco, other companies and nonprofits based on gender equality or promoting social justice, may want to limit investments in companies that profit from advertising in a certain manner or who have questionable practices in paying employees (especially those in the garment industry). So, is the Charismatic leader exercising control over the plan if they promise employees to implement new plan guidelines? Or promise to restrict investment options to meet those guidelines?
Is the Commander in chief a fiduciary if she insists that the plan administrator report back to her regularly on specific onboarding and maintenance issues related to the plan? Is she a fiduciary if she insists on setting rules for how employees are onboarded onto the plan?
Under the Department of Labor’s rules, one is a fiduciary when they are involved in determining investment options to offer in the plan or exercising authority over day-to-day administration of the plan. That means most members of the board will be considered fiduciaries and board leaders, even if not named as fiduciaries may well be. And in the two examples above, the leaders could qualify as fiduciaries even if not named. Of the five specific duties required of fiduciaries, it could be that the requirement that the fiduciary adhere to plan documents may trip up some of the leaders with the above-described styles. As a reminder, the rule requiring adherence to plan documents says that a fiduciary must perform his or her duties in accordance with the plan’s documents, so long as those documents comply with ERISA.
How can a financial advisor help synchronize the leader’s style with the needs of complying with ERISA or limiting risk exposure? Some recommend using a committee, appointed by the board, to address plan issues. In appointing this committee, its important to ensure that committee members have sufficient time to become informed about the plan and the business. This amount of time is also crucial to showing that the committee can meet another of the five specific duties of a fiduciary, namely the prudent investor standard. That standard requires a fiduciary to act with care, skill and prudence, as well as diligence as would a prudent investor acting on their own.
Another key to helping to synchronize leadership styles and plan fiduciary responsibilities is to maintain appropriate documentation for the plan. This includes maintaining both a paper file or notebook and an electronic file, which would include all final plan documentation (bearing signatures), current summary descriptions of the plan, the latest reports, along with any tax-related letters, and any service provider contracts or policies. Keeping these documents up to date helps keep the focus on compliance with ERISA and less on the leader’s broader goals or situational changes.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.get xpress proposal