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Investment Committee Best Practices for 401(k) Plans

November 12, 2015

Jessie Kanter, CPA

What is an investment committee?

An investment committee is a crucial component of the plan fiduciary’s prudent process of monitoring the retirement plan’s operations specific to the plan’s investments. While it is not the investment committee’s role to manage the investments, the committee is responsible for the monitoring of the investment managers hired by the plan, as well as the investment options offered to plan participants. This includes ensuring that quality, diverse investments are offered in order to allow participants to invest in appropriate investment options based on their risk tolerance.


Investment Committee Best Practices

Plan fiduciaries are highly scrutinized due to the regulatory nature of retirement plan operations and the rules under ERISA. Plan fiduciaries should consider implementing the following best practices in order to demonstrate fiduciary responsibility.

Create a formal investment committee: It is not enough to casually meet and talk about the investment offerings within the plan. The plan fiduciary should formally appoint the appropriate people to the investment committee based on the structure and nature of the company and the retirement plan. 
The number of people on the committee will vary from plan to plan, but should generally consist of the plan administrator and personnel from finance and operations. If the company is subject to a collective bargaining arrangement, the fiduciary may also wish to appoint a member of the union to represent those employees.

Meet regularly: The investment committee should meet at least annually and, in many cases, more frequently, to review the performance of investment options. A record of those meetings should be maintained to memorialize the occurrence of each meeting and the decisions made by the committee. The investment advisors should be in attendance at these meetings, at least annually, and present to the committee the performance of the plan’s investments.

Develop an investment policy statement: The investment committee should develop a formal investment policy statement in order to provide guidance to the committee regarding the investment performance of the funds offered by the plan. This will provide the committee with a formalized method of placing investments on the watch list and removing and/or replacing funds offered to participants.

Monitor third-party service providers: The investment committee should discuss the performance of all third-party service providers used by the plan. This would include the quality of service provided (customer service to the plan administrator and participants, including participant education), the ease of use of the service providers’ systems, services offered (custodial, transaction processing, compliance), any problems encountered when dealing with the service provider and more. The committee should also be reviewing the service providers’ SSAE 16 reports on their design of internal controls and the operating effectiveness of those controls.

Review service provider fees: The fiduciaries of the plan are responsible for monitoring the reasonableness of fees charged to the retirement plan. In order to do this, the investment committee should first understand all the services provided to the plan by the service providers. The committee should gain an understanding of these services and the fees charged by reading contracts and discussing fees with the service providers. The committee should question the service provided (are they necessary to the operations of the plan?) and the reasonableness of the fees charged for those services. The committee may wish to consult with an outside consultant to have a benchmarking study done on the plan fees. Often, this can be done at a minimal cost or at no cost to the plan.

Having a structured, well-managed, investment committee in place for your retirement plan will help demonstrate the fulfillment of fiduciary responsibility and protect the company and the fiduciaries from litigious harm.

 

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