Any time is a great time to do a little 401k plan housekeeping. But the New Year is a perfect time to address many of the “annual review” items in the 401k compliance and governance checklist. As the New Year unfolds, plan sponsors may want to evaluate the composition of their Investment Committee. Don’t have an investment committee? Well, now is also a good time to create one.
Read More on Investment Committees
Read More on Investment Policy Statements
A close relative of the Investment committee is the Investment Policy Statement (IPS). The IPS is a document that outlines you company policy on investments in the retirement plan such as a 401k. Ideally, your investment committee should collectively draft your IPS and use that document as the “game plan” throughout the year to guide investment decisions.
OK, so let’s examine the ideal composition of an investment committee. As we just learned, the investment committee should ensure that the there is:
- Active and competent oversight of the selection and monitoring of investments, either directly or in supervising an outside professional investment manager; and,
- Ensuring that the plan is relevant in a changing environment. Plan design and participant demographics are not static, so the investment committee must keep pace with this dynamic environment.
What is the Right Composition and Size for an Investment Committee?
There is no right answer, but there are optimal rules for this. Starting with the optimal size of the committee:
- The size of the committee should be based on the size of the plan, the larger the number of participants, the more complex the issues become and therefore the committee will likely need to have more members.
- Especially with smaller committees, it may make more sense to have an odd number of members to establish a quorum or ensure a majority vote on contested issues.
Who Should Be on an Investment Committee?
A natural fit for a committee member would be from human resources department or finance. However, one does not need to be a financial professional to be an effective committee member. The goal is to assemble multiple viewpoints that appropriately serve the best interests of the plan participants. However, it may be prudent to ensure that prospective committee members meet some simple qualifying criteria such as:
- Willingness and desire to serve and participate,
- Ability to commit the necessary time to attend meetings and to prepare,
- As with any committee, members must have strong collaborative abilities
Disclosure of Fiduciary Responsibility and Delegation
According to Alliant Wealth Advisors:
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.
Make a Plan and Stick to it!
After your committee have been established, set clear goals and agendas. Alliant Wealth Advisors offers the following tips for optimizing committee operations:
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.
Finally, document like crazy. Like any formal committee meeting your minutes should clearly and specifically document:
- Full list of all attendees (both internal and outside parties…”everyone” means everyone)
- What was discussed (follow the publish meeting agenda as closely as possible)
- What resolutions were passed (what actions were decided upon?)
- Memorialize your actions and decisions as they relate to your policies (as detailed in your IPS)