Best Practices for Investment Committees E-Book

Rocco DiBruno

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 111

Veröffentlichungsjahr: 2015

Beschreibung

An indispensable guide to avoiding the legal and financial pitfalls and of retirement plan investment While it has always been true that a well-staffed and managed investment committee is key to the success of a corporate retirement plan, in today's increasingly complex and litigious world it is also a matter of survival. But what constitutes a prudent investment committee selection and operating process? How should a committee be selected and governed? How much reliance should a committee place on outside consultants? Written by an author with extensive, in-the-trenches experience, this book provides complete answers to these and all vital questions concerning the creation, staffing and management of a highly-adept investment committee, along with expert advice and guidance on serving on an investment committee and ensuring that your 401(K) investment program is sound, efficient and in complete compliance. * Offers expert advice and guidance on how to serve successfully on an investment committee, facilitate effective management, design and implement a robust investment policy and much more * Packed with sample documents, forms, templates, checklists, diagrams and other valuable, ready-to-use resources * Features numerous real-world examples drawn from the author's years of experience as an accredited investment

Leseprobe

Contents

Foreword

Introduction

Chapter 1: Why You Need a 401(k) Investment Committee

Establishing a Benefits Committee

The Role of the Investment Committee

Defining a Prudent Investment Process for 401(k) Plans

Chapter 2: Forming an Investment Committee

Choosing the Right Investment Committee Members

Requirements for Being an Investment Committee Member

Indoctrinating New Investment Committee Members

Chapter 3: Investment Committee Meetings

Control of the Agenda

Information Provided

Disagreements

Documenting Deliberations

Creating and Maintaining Plan Fiduciary Records

Chapter 4: Importance of Investment Policy

Benefits of the IPS

Implementing the IPS

Chapter 5: Complying with Erisa Section 404(c)

Transferring Investment Responsibility

Ensuring ERISA Compliance

Actions the Committee Should Take

Chapter 6: Selecting, Monitoring and Replacing Investment Managers

Committee Responsibility

Selecting the Mutual Fund Manager(s)

Screening

Fund Monitoring Procedures

Review Process

Creating a Watch List Process

Chapter 7: Employer Stock in the 401(k) Plan

Chapter 8: Hiring a Pension Consultant

Additional Questions to Ask a Consultant or Investment Advisor

Co-Fiduciary Services

Chapter 9: Fiduciary Liability Insurance

Related Coverage

Managing Cost

Chapter 10: Understanding Investment Expenses & Fees

Getting Started

Indirect Expenses

Appendices

Appendix 1: Investment Option Evaluation Form

Appendix 2: Investment Committee Meeting Minutes

Appendix 3: Fiduciary Acknowledgment Letter

Appendix 4: By-laws and Operating Procedures for the Investment Committee

Appendix 5: Fiduciary Audit Checklist

Appendix 6: Glossary

Appendix 7: Resources

Copyright © 2006 by Thornburg Investment Management, Inc.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Foreword

Investment risk is a term with which nearly everyone has, at least, some familiarity—an understanding painfully reinforced by the recent dot.com crash and bear market. Fiduciary risk, on the other hand, is a topic most people would struggle to define.

Quite simply, fiduciary risk is defined as the degree of uncertainty associated with a fiduciary’s management of investment decisions.

In the case of a 401(k) plan, the tipping point for fiduciary risk is directly related to the conduct of the plan’s investment committee. If the committee puts together a lousy selection of mutual funds and/or fails to control investment expenses, no amount of participant education is going to make up the shortfalls in the participant balances.

By law, the investment committee must demonstrate that its investment decisions are procedurally prudent—they will be measured against a prudent expert standard. What constitutes a prudent process? Who should be involved? How should the committee be governed? How much reliance should the committee place on outside “consultants”?

All relevant questions will be answered in this timely text.

The management of an investment committee is no different from the management or supervision of any other business enterprise. It does not require committee members who have extensive experience in securities analysis or portfolio management; it does require selecting members who have an interest in understanding the basics of capital markets.

It requires selection of a team that has a sincere commitment and courage to develop a consensus formulation of goals and objectives with fellow committee members, the discipline to develop long-term investment policies, and the patience to evaluate events calmly in the context of long-term trends. It requires putting together a committee that has the ability to get the right things done—otherwise known as effective management. Prudent procedures, such as the ones outlined in this book, facilitate effective management by distinguishing the important tasks of the investment committee from the unimportant.

All the best,

Donald B. Trone,

Strategic Ethos, CEO (Chief Ethos Officer)

Introduction

For many, the term investment committee conjures images of a group of seasoned financial experts who are highly qualified and skilled in managing an investment portfolio. In reality, most individuals who sit on a 401(k) investment committee are likely to have little or no experience in managing an investment portfolio. In this post-Enron, and ever increasing litigious environment, I feel compelled to write a simple guidebook, Best Practices for Investment Committees, that will provide a clear and concise explanation of how to successfully structure an investment committee.

This book is part of an ongoing series offered by Thornburg Investment Management to provide education and insight to financial advisors and plan sponsors in the area of fiduciary responsibility for qualified retirement plans, specifically 401(k) plans. The first installment in the series, Understanding ERISA—A Compact Guide to the Landmark Act, by Ken Ziesenheim, explains the Employee Retirement Income Security Act (ERISA), including the standards that govern fiduciary conduct of 401(k) plan sponsors and providers. It focuses on the fact that any person(s) who exercises any discretionary authority or control in management or administration of the plan or its assets is indeed a fiduciary. The book outlines the duties and fiduciary responsibilities under ERISA and shows how following a prudent process can mitigate fiduciary exposure.

A second book, entitled How to Write an Investment Policy Statement, details the steps that should be taken in preparing an investment policy statement (IPS)—a written document outlining the process for a plan’s investment-related decision making. The purpose of the IPS is to provide a formal description of a plan’s goals and objectives as well as to serve as an objective framework for an investment committee to use in making investment decisions that are reflective of and in keeping with the plan’s strategic vision for investing.

Now this third book in the Thornburg series, Best Practices for Investment Committees, guides committee members through the next step—how to execute and implement the plan’s investment policy. The book discusses the benefits of having an investment committee and examines the roles and responsibilities of committee members. Though the book was written primarily for 401(k) plans, many of the concepts can be applied to trustees and individuals who sit on the board of an endowment, foundation, or public retirement plan. Because investment committees are made up of individuals who may have different ideas and levels of experience in managing money, the concepts in this book, along with implementation of the investment policy statement, can help an investment committee develop a disciplined, yet practicable decision-making process. Following the suggestions and ideas in Best Practices for Investment Committees can serve as a valuable risk management tool against potential fiduciary liability.

CHAPTER 1

WHY YOU NEED A 401(k) INVESTMENT COMMITTEE

Studies show that many of today’s 401(k) plans do not offer a fully diversified menu of investment choices. “Nearly two-thirds of 401(k) plans aren’t offering enough choices and lack the right types of funds needed to create a diversified portfolio suited to each worker’s risk tolerance”.1

One of the common misconceptions in the 401(k) retirement market is that when the plan participants are responsible for making their own investment decisions (also commonly referred to as participant directed plan), then the plan sponsor is free from liability relative to the investment options. This is a complete fallacy. Under the Employee Retirement Income Security Act (ERISA), 401(k) plan sponsors are accountable for providing plan participants with an array of appropriate investment options to allow the participants to properly diversify and avoid the risk of large losses. However, the plan sponsor has a fiduciary obligation to monitor these investment options on an ongoing basis to ensure they continue to be prudent and appropriate for use.

A best practice for company sponsors of 401(k) retirement plans is to form an investment committee to participate in the governance of the plan and to oversee the plan’s investment options. Small-plan sponsors typically argue against having investment committees, especially for smaller plans, and suggest that it is too time consuming. “My partners and I review the funds as need-be,” says one small-plan sponsor. Sponsors of 401(k) plans need to understand that under ERISA they are fiduciaries and as such are personally liable for their actions. Having such a casual approach to the very important process of monitoring the appropriateness of the investment options being provided to the participants leaves them fully exposed to lawsuits. In today’s environment, the best way for plan sponsors to manage their fiduciary liability is to develop, follow and document a prudent investment process.

Establishing a Benefits Committee

Advancements in technology and productivity have given us access to products and services that previously were thought to be unavailable or unaffordable. For one, it wasn’t that long ago that automobile safety features like antilock brakes and airbags were available only in high-end luxury cars like Mercedes-Benz or Lexus. Currently they are standard features whether you are driving a car that costs $70,000 or $17,000. There are many examples of products and services that originate up market and eventually trickle down to all consumers. Most large pension and 401(k) plan sponsors, as well as nonprofit and government plans, use an investment committee to oversee the investment management process. The reason is simple: protect the plan against potential or unforeseen liability. In light of poor investment performance, lack of understanding of plan fees and revenue sharing arrangements, mutual fund scandals, and the recent wave of new investment products (lifecycle and lifestyle funds, managed accounts), the need for plans of all sizes to form a benefits committee or separate investment committee is becoming an important factor in the management of 401(k) plans. Regardless of whether your company has a plan with $1 million or $100 million in assets, ERISA standards are nondiscriminatory and are applied equally.

Let’s take a closer look. ERISA requires that all plans have a plan administrator and named fiduciary who are responsible for the operation and administration of the plans. A common practice for ERISA covered plans is the establishment of a benefits committee to serve as the plan administrator and named fiduciary, because many functions of the benefits committee are fiduciary in nature and must be carried out in the best interests of plan participants and beneficiaries. (AON). To comply with their obligations, fiduciaries must exercise the care of a prudent person who is familiar with all aspects of the plan and investment issues. Although benefits committees have ultimate responsibility, they often delegate some of their fiduciary duties by forming an investment committees or employing outside service providers.

The investment committee is responsible for managing the investment process for the plan, whereas the benefits committee is charged with much broader responsibilities of administering the plan. The benefits committee’s responsibilities are the non-investment related issues such as plan design, administration issues, and employee communications.

In this highly charged environment of corporate governance, regulatory scrutiny, and fiduciary liability exposure, the creation of a separate investment committee (whose responsibility is limited to reviewing the investments in the companey’s 401 (k) plan), is a sound risk management strategy for plans of all sizes.

The Role of the Investment Committee

The scope of fiduciary responsibility for investment committees is much wider than generally recognized because the ERISA definition of fiduciary is so broad. Named fiduciaries are those listed in the plan documents as having responsibility for plan management. Persons who are delegated duties by named fiduciaries are also considered to be named fiduciaries and, therefore, assume the responsibilities and liabilities that go along with that obligation.

The investment committee is charged with establishing a prudent process by which retirement plan vendors, investment products offered (whether separate accounts or mutual funds), and related expenses are analyzed and monitored on a regular and consistent basis. However, it is important to keep in mind that committee members oversee the management of the retirement plan, but do not manage it themselves. In general, the investment committee has the following responsibilities:

1. Review and approve the fundamental operations, financial and committee charter.

2. Hold meetings regularly.

3. Develop an investment policy statement.