Best Practice: Establishing a Strong Investment Committee
“It is better to first get the right people on the bus, the wrong people off the bus, and the right people in the right seats, and then figure out where to drive.”
— “Good to Great” author Jim C. Collins
In our previous best practice post, we discussed the importance of establishing a solid Investment Policy Statement (IPS) to fulfill your fiduciary obligations and avoid related liabilities. But it’s not enough to simply have an IPS. You also want to establish an engaged and informed investment committee, and task it with keeping your plan’s IPS alive and well over time.
The Function of an Investment Committee
If a well-crafted IPS is your plan’s compass, your investment committee is its keeper in at least two important ways:
- Application – Your investment committee implements the responsibilities described in your IPS, either selecting and monitoring investment options directly, or supervising a professional investment manager who has taken on this fiduciary role (as covered in “Simplify the Investment Decision”).
- Relevance – As your plan’s design, employee demographics or other key factors evolve, so too must your IPS as a living embodiment of such factors. Your investment committee must remain informed of changes that may impact your IPS and update it when warranted.
While there is no such thing as a “perfect,” one-size-fits-all investment committee for every plan, there are several broad factors to consider as you form and maintain a committee best suited for your plan. These include: committee size, make-up, operations and documentation procedures.
Determining the Right Size
The optimal number of committee members depends on the size of your plan. If your committee is too small, you may not receive enough input to make informed decisions. Too large, and your committee may not function productively. (There’s a reason the expression “death by committee” is so familiar.) For smaller plans, we typically recommend three committee members. Larger plans may prefer five or more.
A vital tip: We recommend you have an odd number of committee members –
three, five, seven, etc. – to avoid ties when voting on challenging issues.
Establishing Diverse Make-Up and Credentials
Beyond the number of committee members, you want to seek a representative mix of individuals to contribute diverse viewpoints. This helps your committee consider its decisions from varying perspectives as it fulfills its fiduciary obligation to represent plan participants’ highest financial interests.
With one critical caveat related to fiduciary investment management, which we’ll cover next, good candidates for your committee are often found in your H.R. or finance teams, but members can come from anywhere within your organization. They do NOT need to be financial gurus themselves, as long as they possess:
- Time and interest to meaningfully participate.
- Ability and desire to serve as a champion for the essential investment tenets described in your IPS.
- A collaborative approach to contributing their own helpful viewpoint, while remaining open to the ideas that others may bring to the table.
Membership should be rotated periodically as well, to ensure fresh input and avoid committee-member burnout.
Delegating Fiduciary Investment Management: To Protect and to Serve
Getting back to that critical caveat we mentioned above, in a best-practice environment, your Investment Committee’s fiduciary duty – and potential liability – should be limited to selecting a prudent, fiduciary investment manager. That manager should assume or at least share in the fiduciary duty for selecting and retaining your plan’s investment option line-up.
In other words, it’s reasonable to expect a diligent investment committee to be responsible for picking the right advisor. But the advisor – the financial specialist in the room – should be responsible for the consequences of his or her advice about your plan’s line-up. The technical jargon for this is advisors who take on the ERISA section 3(38) fiduciary investment manager role or at least the ERISA section 3(21) co-fiduciary role.
Sadly and surprisingly, most plans are NOT set up in this manner. More often than not, those presenting themselves as investment professionals are recommending products, but are not accepting any fiduciary liability should their recommendations ever face a legal or regulatory challenge. This leaves your Investment Committee under-protected against liability and potentially under-serves your participants’ highest interests.
Clearly, this is a big deal, particularly given how prevalent this “gotcha” remains among most plans and how easy it is to eliminate. How do you know if your “advisor” is fiduciary? Believe me, it’s hard to tell from the fine print of the agreement. It’s complicated enough, in fact, that it will be the subject of our next blog post – perhaps among the most critical posts in this series.
A vital tip: Before they agree to serve, committee members should be made aware that they are functioning as plan fiduciaries, with a high level of responsibility to participants and potential personal liability should the plan face a regulatory or participant-driven challenge.
Optimizing Your Operations
Once you’ve got your players in place, the next step is to structure the committee to maximize its effectiveness. Some ideas on this front:
- Meeting frequency – If you have delegated the investment option selection to an ERISA section 3(38) fiduciary investment manager, we recommend the committee meet at least annually. If the committee is serving as the fiduciary responsible for investment option selection or has hired a co-fiduciary under ERISA section 3(21), then regular quarterly meetings are a best practice, with increased frequency during periods of higher activity, such as if you’re transitioning to a new service provider.
- Outside expertise – Consider turning to an outside retirement plan consultant to attend or even lead meetings. He or she can be an objective facilitator for discussions on challenging issues, and also can serve as a valuable resource when expert industry knowledge is required.
- Meeting efficiencies – To help committee members remain engaged, meetings should be structured efficiently. For example, set reasonable agendas and timeframes. Encourage committee members to come prepared for each meeting and wrap each meeting with outstanding action items.
Document, Document, Document
If we leave you with only one take-home from this post, it’s the critical role that investment committee documentation plays in your successful plan. Meeting minutes represent the written evidence that you have properly done your fiduciary due diligence. They also serve as a handy historical reference to guide future meetings and decisions.
Assign the responsibility for taking meeting minutes to one individual, who documents:
- Who attended each meeting
- What was discussed
- What was decided
- What prudent processes and rationales were used in forming decisions
A vital tip: Just as nobody can hear a tree falling alone in the woods, all of your diligent fiduciary efforts can fall on deaf regulatory ears if you fail to rigorously document the discussions, decisions and rationales used by your committee.
Do you like what you’ve read so far? We also offer a complimentary presentation to further explore these best practices with you and other key retirement-plan decision-makers at your company. Please contact us to learn more.