If you are like most 401(k) plan sponsors, you worry about whether your 401(k) plan investment committee is focused on the right stuff. Is the committee using its time wisely talking about what is important? Or do you spend way too much time agonizing about investment performance? I believe that 401(k) plan investment committees should focus on reviewing the following at their meetings.
Investment option costs (and performance). This is one item that investment committees generally get backwards. It isn’t that committees don’t spend time on cost, it’s that most spend way too much time on performance, the markets, investment strategies and outlooks. Keep in mind that investment committees have no control over past investment performance, future performance or the markets. But they do have control over the cost of the investment options offered.
The Department of Labor has made it clear, and significant litigation has reinforced, that plan sponsors need to closely monitor the cost of the investment options in their menu. Keeping an expensive fund option in a 401(k) line-up, when cheaper options are available, exposes an employer to considerable litigation risk. Yes, your committee should review investment performance, but it should focus intently on investment option costs.
Provider costs (and performance). The DOL recommends bidding out your provider services (e.g.; trustee, custody, recordkeeping and investment advisory services) every three to five years. However, it’s not necessary to run an RFP process every three to five years. This requirement can be satisfied by conducting a benchmarking study that focuses on where your plan stands relative to the marketplace on costs and services. Make sure that any benchmarking reports and/or RFP responses find their way into your plan file, even if you don't make a change. It is important to be able to document your vigilance in monitoring plan costs and provider performance.
Feature utilization and plan design. Nearly all recordkeepers produce detailed reports that document practically every aspect of your 401(k) plan. Make sure your committee reviews a representative sample of these reports periodically to gain an understanding of how participants are using the plan. Loans, hardship withdrawals, website usage and transfer frequency are among the features that should be reviewed.
Committees should review and discuss the latest trends in plan design and how they may or may not work in their plans. For example, it’s become popular to re-enroll non-participating employees into target date funds each year at a predetermined contribution rate. Studies have found that less than 10% opt out. If you haven’t discussed plan design elements like this at your committee meetings, please consider starting.
Employee communications. Most investment committees don’t spend nearly enough time talking about employee communications, typically delegating all communications responsibilities to HR. As a result, this topic tends to be raised only at committee meetings when there was a communications problem. Be proactive with every decision made and create a communications plan.
Review your 401(k) plan’s annual communications schedule with your committee (including samples of the pieces used). Discuss resources (hard copy, electronic, paycheck stuffers, corporate newsletter, etc.) used to communicate with employees and how the plan may be presented more effectively.
It is helpful, I think, to over-communicate with your employees about your 401(k) plan and do more than what is required. Many required notices (safe harbor, fund change, etc.) are not written with the goal of communicating clearly to employees. Rather, the wording in these notices is suggested by federal authorities and not modified (out of fear) by plan sponsors. So take some time and write a cover memo. Or ask your investment adviser to write one for you. A 401(k) plan that employees understand is much more highly valued than one that is misunderstood or ignored.
Fiduciary responsibilities. Having worked with investment committees for more than 30 years, I can confidently state that no one who joins an investment committee has an understanding of what their fiduciary responsibilities are. Many join feeling they have a duty to make their 401(k) plan better. However, all newly appointed committee members bring their personal and corporate biases with them.
As a result, the most difficult challenge I face each time investment committees make a decision is persuading committee members to leave their corporate, investment and personal biases’ outside the room. Since most are officers in their companies and considered HCEs (highly compensated employees), I ask them to picture a typical non-HCE at their firm and how that person would feel about a decision. Many have a hard time doing this since they are conditioned to please their bosses.
If you see committee members who can’t leave their corporate and personal biases’ at the door, it is your duty to ask them to resign from the committee. I have actually seen courageous HR leaders kick high-ranking executives off investment committees. It takes a lot of political savvy and courage for an HR leader to do that, and I take my hat off to them.
Make sure you spend a portion of at least one meeting each year on fiduciary responsibility education. Your investment adviser should be able to lead that discussion. Most, like me, are accredited investment fiduciaries (AIF) who spend a lot of time staying up to date on fiduciary responsibility.
Documentation of discussions and decisions. If it isn’t documented it may not have occurred. Minutes should be taken at every investment committee meeting and reviewed and approved at the following meeting. Although you are not required to document discussions, and I don’t recommend documenting discussions the majority of the time, when you arrive at a decision that may not make sense without some added background, it is smart to share the reasoning. It’s also important to document some discussions that may not result in decisions. For example, those discussions that relate to costs.
I believe that nearly all meetings can be captured with minutes that are only one page long. If you are ending up with more than one piece of paper for meeting minutes, you are likely taking minutes that are too detailed and might raise more questions than they answer when someone looks back at them.
Hopefully, your investment committee is already using its time to discuss the issues outlined above. If not, consider introducing these topics at your next meeting.
Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, a RIA firm helping 401(k) plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.
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