Investment Matters: Best Practices for Your Plan’s Investment Committee

In the absence of an officially designated — and properly structured — investment committee, your company’s executives and board of directors may find themselves assuming fiduciary responsibilities that they may not have been aware.

However, by designating a committee with certain specific responsibilities over plan investments, fiduciaries can often mitigate their exposure. (This committee is usually separate from the benefits committee, which is responsible for non-investment-related issues.) Such a committee would be responsible for:

  • Establishing a formal process to manage investment strategies
  • Initiating investment decisions
  • Analyzing and monitoring investment-related expenses
  • Establishing due diligence procedures for selecting and monitoring investments
  • Selecting and monitoring any “prudent experts”

Who Should Serve?

Obviously, any committee with responsibility for plan investments should include members with significant financial/investment experience and a thorough understanding of capital markets. It doesn’t have to be a huge committee — three to five members usually will suffice. This typically includes senior members of Human Resources, Finance and Operations, with a Chief Financial Officer or similar person heading it up. Larger firms may also consider the inclusion of in-house legal counsel.

Be aware that ERISA calls for the use of a “prudent expert,” so be ready to look outside the committee for expertise, if needed. A good example is the need to engage an independent advisor to assist with the selection and monitoring of plan investments if members of the committee lack that expertise. The required standard of care under ERISA is that of a “prudent expert” — not a “prudent person.” In other words, it’s not how a member of your investment committee might invest his or her own money, but rather how an expert would invest someone else’s money.

Consider these best practices for forming an effective investment committee:

Make it formal. Ideally, your board of directors will take formal action and appoint an investment committee with an explicit delegation of authority.

Adopt a charter. The committee’s roles and responsibilities should then be further outlined via a charter document, which specifies exactly what responsibilities are being delegated to the committee. In general, investment committee charters fall into three main types:

  • A 401(k) Investment Committee, which provides investment oversight.
  • A 401(k) Administrative Committee, which provides administrative oversight.
  • A 401(k) Oversight Committee, which provides both investment and administrative oversight.

Adopt a statement of investment policy. Note the word “statement.” This does not need to be an exhaustive guide that outlines every investment vehicle and analytical method. Nor should it create inflexible restrictions that tie the hands of your Investment Committee. But the investment policy statement does need to provide direction to guide the committee in its task, including:

  • Stating the goals, investment strategy and permissible (and prudent) investment options
  • Identifying the factors to be considered in selecting investments, such as performance, fees and other factors. Also stated should be factors to be considered in eliminating investments
  • Describing the specific activities the committee will engage in to properly monitor investment performance, as well as the performance of investment advisors

Not So Fast

Your board is ultimately responsible for making sure that the committee is making prudent investment decisions. One way to do this is for the committee to address the board at least annually with an update on the status of the plan, as well as potential future actions.

We can assist you with the proper establishment of your investment committee charter.

About the Authors

Cindy S. Johnson
Cindy S. Johnson
CPA, CIT, CGMA
Partner and Executive Committee Member, Assurance and Advisory

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