401k investment committee

If you are like most employers, you worry about whether you are discussing the right things at your 401k investment committee meetings. Fiduciary compliance is probably the most important topic that investment committees struggle to understand and address correctly.

As a 401k investment adviser who is also an Accredited Investment Fiduciary (AIF), I have worked with investment committees for decades. During that time, I have found the following three fiduciary responsibilities to be most important for every 401k investment committee.


What Your 401k Investment Committee Should Do



1. Review costs


A primary purpose of investment committees is to monitor the cost of the entire 401k plan, not just investments. Although significant litigation has centered on using the lowest cost share class of each investment fund, investment committees also need to closely monitor the cost of all providers. These include the trustee, custodian, recordkeeper, investment advisor, auditor and any other consultant.

Keep in mind that your plan does not need to use the lowest cost provider for every function or the lowest-cost investment fund in each asset class.

You can decide to pay more for a provider offering more services, or an investment fund that you believe offers better performance. You just need to demonstrate that your decision to hire a more costly provider or use a higher cost investment fund was arrived at using a prudent decision-making process.


2. Follow a prudent decision-making process


ERISA, the law that governs qualified 401k retirement plans, requires employers to use a prudent decision-making process when making decisions about their retirement plans.

What is a prudent process?

It is a decision-making process a fiduciary (that is you) uses that employs care, skill and diligence to arrive at a decision that solely benefits plan participants. To better understand how a prudent decision-making process works, it will help to review a few examples. First, an example of a decision-making process that is not prudent.


Example of a decision-making process that is NOT prudent


Your investment advisor works for a bank and is recommending an investment fund that is managed by the bank. The advisor offers no comparison to similar funds in terms of cost and performance. The investment committee likes the advisor and doesn’t want to embarrass him by asking for this information or ignoring his recommendation.

The 401k investment committee votes to accept the investment advisor’s recommendation without any questions or discussion.

Not only did the investment committee not engage in an evaluation process with regard to the fund, it did not explore whether the advisor had any conflicts of interest in recommending it. In many situations like this, an advisor may receive additional compensation from his employer for selling a proprietary fund. As a result, the advice shared by the advisor about the fund may be conflicted.


Example of a decision-making process that is prudent


Your investment advisor works for a bank and is recommending an investment fund that is managed by the bank. The advisor presents a number of reports that illustrate the fund’s performance, cost, risk and other factors in comparison with its peer group.

The investment committee tries to understand why the advisor feels this fund is better than the alternatives and asks a number of questions about the fund. The committee also asks the advisor whether his compensation will be affected in any way if it votes to offer the fund in the plan.

The advisor acknowledges he is required to present investment options the bank manages any time he talks about changing the investment lineup. He admits that his compensation will be increased if the committee decides to add the fund to the lineup.

The committee uncovers a potential conflict of interest and decides not to add the fund that is recommended. Instead, it asks the advisor to come to the next meeting with more information about one of the alternatives.

The committee has engaged in a prudent decision-making process and needs to only do one more thing to comply.


3. Take good meeting minutes


There is no way to prove that your 401k investment committee engaged in a prudent decision-making process unless you document that process adequately in the meeting minutes.

It is tough for a lot of employers to take good minutes. Most either err on the side of taking too detailed minutes, resulting in minutes that are many pages in length, or just recording the committee votes. Following are my suggestions for taking good meeting minutes.

  • Try to stick to one page

Unless your 401k investment committee meetings stretch on for days, one page should be sufficient.

  • Reference attachments to the minutes

Reports used to make a decision should be attached to the minutes for every action taken. It is fair to say something like, “The attached reports detail the options evaluated. After a thorough discussion, the Committee voted 7-0 in favor of the recommendation due to superior historical performance and low cost.”

  • Don’t record discussions that don’t result in decisions

This is the biggest mistake that I see minutes takers making. Your investment advisor will likely spend quite a bit of time talking about recent market performance and expected future market activity. None of these discussions, which can be very lengthy, need to find their way into your minutes.

Your 401k investment committee agenda should be part of your minutes package. In that agenda are outlined the subjects the committee discussed. One of those items is probably a review of the recent quarter’s activity. Attach the report your advisor shares on that subject to the minutes along with the agenda. That’s good enough. It’s not necessary to record whether your advisor feels the Fed will be cutting interest rates soon.


Other key practices for your 401k investment committee


Most investment committee members are senior executives within their companies. As a result, members often mix their corporate responsibilities with their investment committee responsibilities. It is hard not to view everything through a CFO lens when those responsibilities are in the front of your mind 24/7.

Investment committee members should try to do the following when attending meetings about the plan:

  • Take your corporate employee hat off when you walk through the door and put your participant hat on.

  • If it helps, visualize a non-management employee you know and like and think about what would be important to him or her. Remember, you can never discriminate in favor of highly compensated employees, but you can always discriminate in favor of lower compensated employees.

  • If you are doing your job as an investment committee member, you will have occasions when you will need to support initiatives that your boss may not agree with. This is difficult for “C”- level investment committee members to do, since they typically report to the CEO. You need to do it anyway.

One last suggestion: Be courageous in your investment committee meetings and do what you know is right for all plan participants.

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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 (LRPC) 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 employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars 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 https://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, a 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.