An increasing number of plan sponsors are coming to realize that no one person can possibly possess all the legal and investment expertise to manage the complexities of a 401(k) plan on his or her own, which is why many people turn to investment committees for help. Bringing together a group of qualified and knowledgeable people to oversee the investment functions of a plan is a sound strategy, but unless certain best practices are followed, it may not do much to fortify the fiduciary responsibilities of the plan sponsor.
The Purpose of an Investment Committee
The primary purpose of an investment committee is to provide proof that the plan is being managed to the high standards of conduct required by the Employee Retirement Income Security Act (ERISA). ERISA provides very little guidance for plan sponsors in establishing procedures and practices for carrying out their responsibilities. It is generally left up to plan sponsors to interpret the rules and apply whatever skills and resources that they have to ensure their plan is in full compliance. Many plan sponsors have established investment committees to provide investment oversight and share in the fiduciary responsibilities of managing their plans. The existence of an investment committee demonstrates a commitment to follow formalized procedures and practices in order to ensure strict compliance with ERISA. Following best practices can ensure that ERISA’s requirements of accountability, objectivity and due diligence in managing plan assets are met.
Best Practices for Investment Committees to Follow
Create the Optimum Composition
Participation in the investment committee should be voluntary, but it should be representative of the various interests involved. Anyone who serves in a fiduciary capacity with the plan should be included. Senior management should be represented either by the Chief Financial Officer (CFO) or the Chief Operating Officer (COO). The company’s legal counsel should also be present at meetings. These should be the only permanent members of the committee who have voting power. Additional participants can include a representative of the employee group as well as representatives of the plan’s providers, such as the trustee, administrator and the plan’s investment advisor. These members may have no voting power, and their memberships may be restricted to three- or four-year terms. Each year, the membership should select a chairperson and a secretary who is responsible for documenting all discussions and decisions during the committee meetings.
Create a Written Charter
A written charter formalizes the committee’s structure and establishes expectations for what it is to accomplish. In addition to defining the purpose and responsibilities of the committee members, it details the processes for conducting plan reviews and making decisions. The charter should go into detail as to how members are selected or removed, when and how meetings are conducted, how investment advisors and third-party vendors are selected, and who can act as an authorized agent to carry out the directions of the committee.
Create an Investment Policy Statement
Having a formal investment policy statement (IPS) ensures consistency in how the investment plan is managed. Although there is no ERISA requirement for an IPS, having one in place is further demonstration of a commitment to fiduciary standards of conduct. The IPS need not be lengthy or detailed. Its purpose is to act as a guide for making sound decisions consistent with the plan’s investment philosophy. The IPS is also the guiding document for the plan’s investment advisor, whose performance is reviewed in light of its guidelines. The IPS should be reviewed at each meeting in order to frame discussions and decisions.
If the primary purpose of the investment committee is to provide proof of adherence to prudent processes and practices for making investment decisions, the most important duty of the committee is to document everything thoroughly, including committee meeting minutes, meeting attendance, discussions, decisions and details on how decisions were formulated. The record should be circulated to all committee members for verification of accuracy and their endorsement. It should also be made available to anyone with oversight responsibilities, and filed with other fiduciary audit materials.