By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

If you are like most 401k plan sponsors, you worry about whether your 401k plan investment committee is focused on the right stuff. Is the investment 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 your 401k plan investment committee should focus on reviewing the following at their meetings:

Investment option costs (and performance)

This is one item that every investment committee generally gets 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 an investment committee has no control over past investment performance, future performance or the markets. But it does have control over the cost of the investment options offered.

The Department of Labor (DoL) 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 401k line-up, when cheaper options are available, exposes an employer to considerable litigation risk. Yes, your investment 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 is 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 401k 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 has 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 401k 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 401k 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 advisor to write one for you. A 401k plan that employees understand is much more highly valued than one that is misunderstood or ignored.

Investment committee 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 401k 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 bias’ 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 bias’ 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 advisor 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 is 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.

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About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.