Investment Committee Effectiveness Backgrounder 

    Steps Small Business and Foundations Can Take to Develop a Dependable 401(k) Program 
    Published May 09, 2005

    How Does the Investment Committee Function?

    Who Should Serve on the Committee?

    Managing Fiduciary Liability

    What Topics are Covered in an Investment Oversight Committee?

    A Role That Matters

    In today's litigious, post Enron world, how can employers simultaneously achieve two objectives: (1) provide employees with a broad array of suitability options and (2) fulfill fiduciary responsibility?

    An effective Investment Oversight Committee is the foundation upon which a dependable 401(k) program is built in your organization. Its main purpose is to ensure your plan remains competitive while continually offering a solid array of fund options. The committee does this by participating in the governance of the plan and overseeing investment selection.

    It is recommend that companies or foundations, as plan sponsors, establish an Investment Oversight Committee (IOC). Most small businesses or foundations have no formal committee in place.

    Who should be included in the committee? How often do they meet? Is it different for companies of various sizes?

    How Does the Investment Committee Function?

    The committee is a crucial part of establishing a process for a vendor, fund and fee analysis. We often see a plan sponsor without a formal committee that has one or two executives who occasionally look at the fund review that is prepared by the vendor itself. This casual approach simply will not insulate the company from participants' complaints or law suits.

    A formal committee meets two to four times a year, monitors the investment options, notices and discusses the relevance of any factor in a fund that could affect its continued suitability and decides the inclusion or elimination of the funds from the line-up. Minutes of every meeting should be taken and sent or made available to the retirement administrative committee and the Board of Directors. We cannot over estimate the importance of clear lines of communication between these entities as a preventative of future problems including legal issues. Many committees include the administrative functions of the plan and discuss these topics as well. In our experience, we find that many plan sponsors have separate committees for investment and administrative concerns once the plan grows to about 1,000 participants. When there are two committees, we suggest that at least one executive, usually the HR person, sits on both committees.

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    Who Should Serve on the Committee?

    An Investment Oversight Committee is usually comprised of senior managers from the areas of finance, operations and human resources. Typically, a committee with four to six members functions best. While it is not required, the committee should appoint a chairperson, who often is the Chief Executive Officer of the company.

    "Guests" sometimes attend committee meetings on a regular or rotating basis (usually employees from different business units) to give plan participants a voice in the management of their retirement plan. However, "guests" are not permitted to vote on issues.

    Each committee member must be aware of his or her corporate and personal fiduciary responsibility, and fully understand the investment review components. New members must also be trained to understand the fund monitoring process.

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    Managing Fiduciary Liability

    Committee members should be aware that they have corporate and personal fiduciary liability. Each member should thoroughly understand what their fiduciary responsibility is as well as thoroughly understand the investment review components. When new members are added they too should be trained to understand their fiduciary responsibility and fund monitoring process. It is a mistake to assume all members understand these issues. They need to be taught.

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    What Topics are Covered in an Investment Oversight Committee?

    A typical meeting covers these topics:

    • Review of investment array.
    • Evaluation of funds in light of your Investment Policy. 
    • Discussion of on-going participant needs and education. 
    • Trends and legislations effecting plans and participants. 
    • Fee review by funds.
    • Monitoring each fund; review of investment consultant's report.

    Many committees also review and discuss the administrative functions of the plan.

    Meeting minutes should be distributed to the retirement administrative committee as well as the Board of Directors. Clear lines of communication are vitally important to the process in order to prevent future problems, including legal issues. For larger plans with over 1,000 participants, there are often separate committees for investment and administrative concerns. When this is the case, we suggest that at least one executive serve on both committees.

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    A Role That Matters

    An effective Investment Oversight Committee is the cornerstone of the 401(k) program and ensures the plan remains competitive and continues to offer a good line-up of fund options. Each member's input and perspective is critical to making the plan a great one. All committees require time. Participation on the Investment Oversight Committee absolutely influences decisions that affect everyone in the plan.

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