Establishing an Investment Committee for 401(k) Plans

Establishing an Investment Committee for 401(k) Plans

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Plan sponsors have a fiduciary responsibility to manage the investment options offered to participants. ERISA requires that these investments be monitored on an ongoing basis for appropriate use and continued prudence. In order to ensure this happens, plan sponsors should establish an investment committee to oversee and manage all investment processes for the plan. The investment committee is usually separate from the benefits committee, who are responsible for non-investment related issues. Some objectives and responsibilities of an investment committee are to:

• Establish a formal process to manage investment strategies.
• Initiate investment decisions.
• Analyze and monitor investment related expenses.
• Develop an investment policy statement and document all decisions made.
• Establish due diligence procedures for selecting and monitoring investments.
• Review the activities of “prudent experts.”
• Review the investment management fees paid by the plan and participants.

Establishing a committee involves choosing committee members and drafting a charter. Committee members normally are senior members of Human Resources, Finance and Operations, and are normally headed by Chief Financial Officers or others who have an understanding of capital markets. It is recommended to keep investment committees small and to have an odd number of voting members, such as 3 to 5 members. The draft charter should define the purpose of the committee, the members and their status in the committee, and the frequency of meetings held by the committee. Each member’s acceptance in the committee, along with their positions and duties, should be formally documented in writing. The committee should meet quarterly or semi-annually with the duration of meetings being sufficient to review and resolve all issues. Minutes should be kept and all documentation should include dates of meetings and an accurate account of all discussions and decisions made throughout the entire duration of the meeting.

Joe Goodmiller