Is Your Investment Committee Frozen in Place?

Best Practices for a Successful Investment Committee

Many small- and mid-size employers don’t have investment committees for their defined contribution plans. This is a problem, of course. Even small businesses need to name investment committees and conduct regular reviews of their retirement plans.

But having a committee with no process in place may be a bigger problem. The reason goes back to fiduciary duty—and the potential for lawsuits for failing to carry out those duties in a satisfactory manner. The case against the plan sponsors at Oracle is an example where the members of the investment committee were named in the lawsuit alleging breach of fiduciary duty.

A plan sponsor’s processes for selecting committee members and running committee meetings are both important for compliance with ERISA rules around fiduciary duty. Below, I’ve outlined some best practices for plan sponsors to follow to help avoid expensive legal action that can be arduous for both the employer and the employees who serve as investment committee members.

Staffing your committee

Choose members deliberately – Plan participants expect members of their plan’s investment committee to represent their best interests and make prudent decisions on their behalf. The individuals on the committee should understand the weight of these obligations. Not everyone is up for this level of responsibility, so it’s important to select members who are willing to commit to their roles. It’s also important to seek out individual skills that will be valuable to the committee as a whole.

Acknowledge fiduciary status – Many individuals who serve on investment committees may not realize they are assuming fiduciary responsibility and potential personal liability. Asking committee members to sign a letter of acknowledgement establishes a baseline of fiduciary understanding, so there should be no surprises among members if a participant lawsuit is filed.

Provide fiduciary training – Not everyone understands what a fiduciary does or what fiduciary duty requires. This should not preclude any internal business partner from serving on the committee, but it does mean training for this individual should be considered. A third-party source can provide objective and unbiased training on fiduciary duties.

Know the code – Reading government regulations isn’t everyone’s cup of tea, and reviewing documentation from the Department of Labor (DOL) can be especially taxing. Plan fiduciaries should be aware of the details inside the regulations, even if the written content is dry and technical. The DOL summarized the relevant parts of the fiduciary duty rules from ERISA in this booklet. Third-party resources can also help committee members navigate the complexity of DOL language to promote greater understanding of their responsibilities.

Running the show

Set an agenda – A clear flow for committee meetings will set direction, keep discussions on track, and help committee members fulfill their duties. Designate a committee member to take notes, distribute meeting minutes and maintain a history of proceedings.

Review the fund lineup – Refer to the plan’s Investment Policy Statement and evaluate each fund based on the criteria used to select the fund in the first place. Don’t limit the evaluation to performance—consider these factors as well. Also, look at each fund’s composition regularly to check for style drift. Funds may change their composition over time and overlap between funds in the plan lineup can occur. Participants may believe they are sufficiently diversified, when in fact they may be holding two different funds many of the same investments.

Focus on fees – This one is important, because fees have been the focus on many of the recent class action lawsuits filed by participants against plan sponsors and fiduciaries. Review the different share classes available for each fund to ensure the investment lineup includes the best share class available.

Meet on schedule, at least quarterly – Repetition is key to success. Establish a reasonable schedule for ongoing committee meetings and stick to it. That will help promote consistency within the committee and help committee members grow more comfortable and confident in carrying out their duties.

Gather, review, and repeat

Remember whenever you’re learning something new—it takes practice to get it right. The process of reviewing plan options and fees will become easier over time. What’s important is for the investment committee to meet on a regular basis and become more familiar with the importance of their roles. The best practices I outlined above can help you start your committee on the right foot and stay on a clear path toward fulfilling your duties as a plan fiduciary.