Why forming an investment committee is in a plan sponsor’s best interest

Among other things, your committee can help better position you in the event of a DOL audit.

Investment committees should document all meetings in the form of minutes as a record of the process used to arrive at each decision that is made. (Photo: Shutterstock)

Plan sponsors are tasked with a myriad of responsibilities as a fiduciary of their company’s 401(k) plan.  These responsibilities are almost always complicated and can have far-reaching consequences if not fully understood and sufficiently addressed.  Additionally, the decisions made and the policies implemented by the plan sponsor fall under hard scrutiny in the event of a Department of Labor audit. For these reasons it is in the plan sponsor’s best interest to form an investment committee to oversee the operations of their 401(k) plan.

The challenge

Section 29 U.S. Code § 1104 explains fiduciary duties over retirement plans by defining the “Prudent Man Standard of Care.”  This standard states that “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and –

  1. With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims
  2. By diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly not prudent to do so; and
  3. In accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of the subchapter.”

So what does this mean?  In plain terms, fiduciaries should always act in the sole interest of plan participants, should select investments to mitigate catastrophic risk, and always act in accordance with any governing documents applicable to the plan.

Meeting the challenge

In order to ensure that they are meeting the challenge, plan sponsors should ensure that they perform the following:

  1. Develop an investment policy statement for the plan, which should describe the investment objectives of the plan and strategy for meeting those objectives.
  2. Choose a qualified default investment alternative (“QDIA”), to be utilized when participants do not make their own investment election.
  3. Select a qualified service provider (recordkeeper, custodian, investment advisor, auditor, etc.)
  4. Monitor investment performance and modify investment options as necessary for poorly performing investment.  Diversification of investment options should also be considered.
  5. Benchmark fees charged by investments and service providers. *

Many plan sponsors are aware of these issues and may even address them from time to time throughout a plan year.  However, this falls woefully short of fulfilling their fiduciary responsibility.  An investment committee, which includes individuals at the company who oversee the plan, should be formed and should meet on a regular basis.  Though not required, plan sponsors may want to consider including an investment advisor and, if necessary, legal counsel in order to sufficiently educate the committee and provide a more informed perspective on some of these topics.

Investment committees should document all meetings in the form of minutes as a record of the process used to arrive at each decision that is made.  Oftentimes, the process and consideration given to a decision is more heavily scrutinized than the results of that decision.  Written minutes will sufficiently document these discussions and will help substantiate the committee’s good faith effort to act in the best interest of plan participants.

Plan sponsors no doubt should form an investment committee to oversee the operations of their 401(k) plan. There is a myriad of responsibilities to manage as a fiduciary of a company’s 401(k) plan, and forming an active investment committee will help keep you out of trouble and better position you in the event of a Department of Labor audit.

Dennis Giangregorio, CPA is a partner at Chestnut Hill, MA CPA firm, Samet & Company PC and can be reached at dennis@samet-cpa.com or 617-731-1222.

Shawn P. Huxley, CPA, MSA is a director at Samet & Company PC and can be reached at shawnh@samet-cpa.com or 617-731-1222. 

James Alexander is a supervisor at Samet & Company PC and can be reached at jamesa@samet-cpa.com or 617-731-1222.

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