As retirement plan sponsors come under increasing regulatory scrutiny for their fiduciary responsibilities in managing plan assets, investment committees are playing a more prominent role in the investment decision making process. Although the Employee Retirement Income Security Act of 1974 (ERISA) does not require it, establishing an investment committee is considered a sound risk management strategy for plan sponsors who must shoulder most of the fiduciary liability. By establishing an investment committee, plan sponsors are better able to maintain focus on the vital issues that impact plan participants.
Establishing an Investment Committee
The plan sponsor establishes an investment committee by drafting a charter detailing how committee members are selected. The charter should state the purpose of the committee, which is to establish a formal process to manage the plan’s investment strategy. It also establishes the roles and responsibilities of members and requirements for maintaining membership. The charter can designate which committee members are voting members who take on fiduciary responsibilities and which are non-voting members who are not considered fiduciaries.
Committee Member Roles and Responsibilities
Acquire Requisite Knowledge
Committee members need to become educated on ERISA regulations and their fiduciary duties. Members should have a firm grasp of the procedures outlined in the plan document for managing the plan’s assets, including the plan’s investment strategy. Members do not necessarily need an investment background, but they should be committed to learning what they need to know to make informed decisions. It is the responsibility of committee members to stay abreast of changes in ERISA regulations and legal rulings that affect the plan's management.
Develop an Investment Policy Statement
Create an investment policy statement (IPS) to include an investment philosophy and investment strategy. Due diligence procedures for selecting and monitoring investment options should be well-articulated. The IPS should include benchmarks for measuring plan performance. It should also include a process for selecting and evaluating investment managers, along with evaluation criteria and procedures for replacing them. The IPS should be reviewed annually to account for any inconsistencies in plan management.
Assess Investment Performance
Compare the plan’s performance to benchmarks in the IPS. Look for changes in the investment management team, investment style, fees or expenses, and assets under management (AUM) to determine if all are still consistent with the plan’s investment objective and parameters.
Review Financials
The plan’s financial operations should be reviewed at least annually with a report prepared for the company’s board of directors.
Hold Regular Meetings
Most of these responsibilities and functions are performed at the investment committee meetings, which should be held two to four times per year. All relevant data, including the plan advisor’s report, should be provided, along with an agenda, to committee members before the meeting.
Document Everything
One of the primary responsibilities of the investment committee is to demonstrate that a prudent process is in place and followed for making decisions. This is done through detailed documentation of meeting activities and any decisions made. The committee should include a fiduciary audit file that includes all investment related documentation.
Accept Responsibility
Each committee member should acknowledge and accept all of these responsibilities and duties. Committee members must be aware that ignorance or poor communication cannot absolve them of any fiduciary liability, and ERISA rules and regulations are in place to protect the plan participants, not the committee members or the plan sponsor. The ultimate responsibility of the plan sponsor and the investment committee is to protect the interests of plan participants, which can be accomplished by creating the best plan possible and managing it by the highest fiduciary standards.
