The Other Fiduciary Issue

In order to accomplish these tasks, the committee must be both competently run and include procedurally prudent processes. Some of the best practices of the best investment committees include having a strong and knowledgeable chairman; employing ethical and competent investment advisors; having a committee that comprises members representing many areas of expertise; and having an odd number of committee members so that there can be a majority vote. In addition, committee members should be diligent about attending meetings, reviewing the documents prior to the meeting, and understanding that their duties are considered to be one of their most important responsibilities on behalf of the plan participants.

Investment committee members must also be diligent about following the plan documents. Fiduciary responsibility is often regarded as only the prudent selection of investment options in the plan, but that responsibility goes beyond just approving those options; if you have late deposits in a 401(k) plan, that also is a fiduciary breach. If you have a prohibited transaction within the plan, then that is a fiduciary breach, and so on. If the plan is designed to qualify as a 404(c) plan, then all of the necessary disclosures and documents must be made available to the plan participants. In short, the best investment committee members understand that they must do everything to the best of their ability to protect the interests of plan participants.

A common belief is that offering all of the funds that are provided under a particular retirement product is a way to meet the requirements of 404(c). Yet, fiduciaries (committee members) cannot look solely to a product provider or a product salesperson for this assurance. Investment committee members must dig deeper to discover the underlying biases that may exist within each product.

Another best practice for investment committee meetings is to conduct periodic “update meetings” to discuss any legal changes that apply to retirement plans. A case in point is ERISA, which is dynamic. Originally passed in 1974 as a landmark piece of legislation, ERISA has undergone approximately 23 changes that (in addition to changes in other laws) govern retirement plans, not counting labor rules and regulations. Also, the Pension Protection Act of 2006 that was recently signed into law by President Bush represented the most extensive change to ERISA since its initial adoption. As such, the most prudent course of action is to stay educated and informed, which requires an affirmative action by the investment committee.

A final comment concerns the investment committee’s responsibility to know, understand, and periodically review the fees and costs of the plan. In light of recent events, the issue of closely monitoring who is being paid and what the total costs are to the plan and the participants has taken on greater significance. Just recently, several lawsuits were filed against plan sponsors and investment management companies for making undisclosed payments that significantly affected the overall costs of the plan. In this era of heightened regulatory review and oversight, investment committee members must be capable of understanding all fees and then determining whether they are reasonable in light of the circumstances.

To sum up, recall that investment committee members are vested with a great deal of authority and responsibility for the proper and prudent administration of a retirement plan. The more educated and knowledgeable these members are concerning their duties, responsibilities, and potential liabilities, the better the plan will be for the participants. By adopting some or all of the best practices discussed in this article, retirement plan participants can only benefit. Helping investment committee members become better at their job is a great opportunity for financial and investment advisors to add significant value, grow their business, and contribute to a more healthy economic environment.