Sponsors of 401(k) plans are not required to form an investmentcommittee under the Employee Retirement Income Security Act, whichexplains why so many plans—even large ones—operate without one.

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That’s a dangerous proposition, according to Jason Roberts, anERISA attorney and CEO of the Pension Resource Institute.

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Roberts travels the country advising plan sponsors and planadvisors on how to not run afoul of their fiduciary obligationsunder ERISA.

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He said plan advisors all too often presume investmentcommittees are only necessary for large or mega-sized plans.

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“That couldn’t be further from the truth,” Roberts said. “It’soften the smallest companies that need the support and protectionof a well-run investment committee the most. Sponsors of thoseplans are running their businesses and wearing multiple hats—oftenat the expense of their fiduciary duties as plan sponsors.”

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Roberts advises all of his clients to form what he terms aretirement plan committee. But it’s not enough simply to have acommittee, he said. Once formed, those committees have to know howto function.

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Too often, committees limit their focus to a periodic review ofthe performance of investments in a plan.

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That is one of a committee’s functions, and an important one,Roberts explained, but if the company limits the committee’soversight to benchmarking investment performance, it isunintentionally ignoring other responsibilities that are key to asponsor’s duty to prudently operate a 401(k) plan.

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“It’s vital that committees allocate time across all aspects ofplan governance,” he said.

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Roberts divides a sponsor’s fiduciary obligations into threebuckets: the selection and monitoring of investments, the selectionand monitoring of service providers, and the administration andreporting requirements under ERISA.

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“If all committees are talking about is the investment aspect oftheir plan, then they are ignoring the two biggest buckets forfiduciary liability,” he said.

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In fact, Roberts said the question of a plan’s investmentperformance exposes sponsors to relatively less fiduciary risk thanother areas of plan governance, such as the question of the fees ona plan and how those costs are paid for.

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In forming a committee that focuses on the entirety of a plan’soperations, sponsors have the benefit of drawing on key employees’areas of expertise for guidance.

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Roberts counsels advisors and sponsors to apply a company’sexisting talent pool to specific committee functions.

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CFOs or company controllers are often a natural choice for aposition on committees, given their financial acumen. Accountantsversed in the nuances of tax filings can apply that skill set tothe duties of documenting the plan. And managers with procurementresponsibilities can compare and vet proposals from recordkeepers.

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Anyone who has discretion over investing plan assets, givinginvestment advice or controlling the administration and managementof a plan is acting as a fiduciary, Roberts said.

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But not all committee members are necessarily planfiduciaries.

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Roberts said sponsors can insulate their employees fromfiduciary responsibility by designating employees as non-votingmembers. “Information gathering, analyzing data and presentingchoices to voting committee members are not fiduciary actions,” hesaid.

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When a properly functioning committee is in place, it only makessense to also have an investment policy statement that shows aplan’s fiduciaries are acting under an informed process, Robertssaid. The statement doesn’t have to be a legally binding document,but it should show fiduciaries are engaged in an objectivedecision-making process.

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Roberts advises clients to articulate their investment strategyin an IPS. For example, if the plan only uses passively managedfunds, that should be stated.

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He also said small and midsized sponsors should document shareclass information, because that informs how record keepers andadvisors are compensated. They should also explain how a plan’sexpenses are paid for.

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If the entire point of the investment committee is to aidsponsors in meeting their fiduciary obligations, the purpose of aninvestment policy statement is to prove that, Roberts said.

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“It’s hard to imagine how you demonstrate prudence withouthaving something in writing,” he added.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.