Best practices for plan sponsors’ investment committees

Employers offering workplace retirement plans would be wise to form committees – if they haven’t already done so – to make sure investments are being managed with the utmost fiduciary care. For plan sponsors that already have investment committees, following certain best practices can help manage challenges that might arise.

Nathan Boxx, AIF, CFP, director, retirement plan services at Fort Pitt Capital Group in Pittsburgh, shares best practices for plan sponsors’ investment committees – including the prudence of involving rank-and-file employees who can then be strong advocates for the plans.

Katie Kuehner-Hebert: What are the challenges and how can an investment committee help mitigate them?

Nathan Boxx: The first issue is not actually having an investment committee. Employers with workplace retirement plans really must have a committee because it provides some formality and sense of a process.

Whenever a company is managing a pool of funds – regardless of what those funds are used for – it’s paramount that a process is followed, and is followed consistently. That will reduce the likelihood that something bad is going to happen and increase the likelihood of positive outcomes.

Who should sit on the committee?

I like for employers to get a diverse group of folks to sit. Not only do they need the named plan administrator and trustee(s), it’s important to also get some people in different departments and maybe different stratas within the organization – including a rank-and-file employee.

When you get a rank-and-file employee involved in the process, you get their buy-in, and then they become a strong advocate of the plan to other employees. When the person is talking to their colleagues about the retirement plan around the water cooler, they can explain why the plan is structured the way it is, why certain things need to happen or why something can’t be a part of the plan.

For example, one question that comes up a lot these days among participants is why ESG funds aren’t in their 401(k) plans. A rank-and-file employee can explain to them why the company currently doesn’t have ESG investments in its plan, because employers are getting conflicting answers from regulators.

There’s a law on the books that states the only factors that plan sponsors can take into consideration when evaluating investments in their plan are returns and expenses, and that makes it difficult to put ESG funds in the plan. If there are two funds with similar return and expense characteristics, the ESG component in one fund can be a tie-breaker, but ESG can’t be a primary factor in the decision-making process, as the law is written today.

Regulators in the Biden administration have indicated they are not going to enforce that law – but what if they change their minds or the next administration does? That puts plan sponsors in a very tough position from a fiduciary duty standpoint. The rank-and-file employee can tell their colleagues that the committee will reevaluate putting ESG investments into the plan after this issue gets clarified with a change in the law.

How often should an investment committee meet and what should they discuss?

At a bare minimum, committees should meet once a year, but it’s a better idea to do it twice a year – and depending on the complexity and the needs of an organization, meeting quarterly might be more appropriate.

Committees should first talk about some of the current legislative and regulatory issues that might affect some of their decision-making – it’s important for them to keep their fingers on the pulse of the latest happenings.

They should also make sure they are reviewing their plan’s investments to make sure they are in line with the committee’s investment policy statement that they have put in place.

It’s imperative for committees to have an investment policy statement because that’s going to provide a framework for their decision-making about the inclusion and maintenance of each investment within their portfolio. If an investment subsequently falls outside the criteria set forth in the investment policy statement, then the guidance also informs the committee about what actions they should then take.

Many committees hire an outside consultant to help them with these types of conversations and decisions – because if they don’t, then they are held to the same standard as the professional advisor.

However, even when committees do enlist the help of outside consultants, all members still have fiduciary duties and responsibilities, and everyone needs to be fully informed about what is required of them before they start being involved in the decision-making process.