Four Best Practices for Forming an Investment Committee
An investment committee can serve an important role with 401(k) plans. As fiduciaries, they are charged with making investment decisions in the best interest of plan participants. Their role typically includes reviewing the services provided to plan participants, establishing the investment policy for the retirement plan, hiring investment advisors and managers, monitoring plan and investment performance and ensuring that the plan’s fees are reasonable in light of the services being provided. If you are thinking of forming an investment committee for your plan, here are four best practices to consider:
1. Start with the big picture
One way to start building a solid committee is to review the plan’s current needs and identify gaps in knowledge or areas that require specific skills. Doing so helps make sure that the committee members have the necessary qualities the committee needs to achieve its goals. In addition, the investment committee should comprise permanent and rotating members to encourage fresh perspectives. Nonpermanent members should be appointed (and rotated off) in alternating years to avoid losing important investment decision history and committee member burnout.
2. Seek out diverse expertise and backgrounds
When forming a committee, having a diverse group of members with different financial backgrounds is very important. These members might include outside financial professionals (such as your plan advisor and a member of your recordkeeper’s relationship management team), human resource representatives and key decision-makers. Each member can bring unique insights to discussions. For example, the chief financial officer may prioritize cost-effectiveness while the human resource manager may focus on things that will make the plan competitive and help recruit and retain talented workers. Having these diverse backgrounds can lead to well-rounded discussions about what’s best for the plan participants.
3. Document-specific roles, duties and responsibilities
Clearly outline the roles and responsibilities of each committee member to promote accountability and ensure that tasks are efficiently distributed among the team. Be sure to record, in detail, the committee’s duties, including selecting and overseeing investment options, evaluating investment managers and conducting periodic performance reviews. Schedule regular committee meetings to ensure duties are fulfilled. Keep records of the meetings and hold committee members accountable for their role in the plan.
4. Cultivate transparency with committee decisions
Clearly detail the decision-making process within the committee, to help promote transparent and accountable procedures. For example, setting up a minimum number of votes and having committee members vote on changes is a great way to encourage transparency.
