ESTABLISHING AN INVESTMENT COMMITTEE

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1 ESTABLISHING AN INVESTMENT COMMITTEE FOR A 403(b) PLAN Overview An investment committee has fiduciary responsibility for managing 403(b) plan investment decisions and overseeing performance of investment vehicles. The purpose of forming a committee is to protect the plan against unforeseen liabilities. More than 70% of 403(b) plans have an investment committee. 1 To fulfill this purpose, it must establish evidence of a prudent investment process by which retirement plan vendors, investment products, and related expenses are analyzed and monitored on a regular basis. Such a process is needed for all plan sizes ERISA standards are nondiscriminatory and applied equally. And remember, the government s interest is protecting the participant, not the sponsor or fiduciary. Generally, an investment committee has the following responsibilities: Review and approve the fundamental operations and financial/committee charter Hold regular meetings Develop an investment policy statement Evaluate investment mangers performance and take appropriate actions Select and remove investment managers Utilize prudent experts and monitor their activities Review investment fees paid by plan and participants Review procedures for providing financial and operational information to the board Document investment process and decisions made In executing its duties, the investment committee must know applicable standards and laws. Members should review plan documents and understand the plan s investment strategy. An investment policy statement should be prepared. Pleading ignorance, bad communications or inexperience will not be an adequate legal defense. Use of prudent experts and properly overseeing them is the only defense on which fiduciaries can rely. 1 PLANSPONSOR Defined Contribution Survey 403(b) Plan Industry Report, 2009 Group, Inc., a Registered Investment Advisor and separate entity from LPL Financial. Representatives of LPL Financial, Inc. and Strategic Retirement Group, Inc. are not tax or legal advisors. Consult with your tax or legal advisor before FOR PLAN SPONSOR USE ONLY - 1 -

2 Key tenets for plan investment fiduciaries: Loyalty- decisions must be made in best interest of plan participants. Diversification a diversified investment menu should be offered to plan participants. Reasonable expenses fiduciaries are not automatically safe if plan expenses are the lowest. Oversight the duty to monitor managers and service providers cannot be delegated or shifted away. Avoidance of prohibited transactions fiduciaries may not use the plan assets for personal gain. Of course, the committee must avoid all conflicts of interest. Selection of Investment Committee Members Members of the committee should be considered based on their position or experience in plan administration, accounting, legal or corporate finance. Members of the committee should have sufficient knowledge of plan documents and procedures to make informed decisions. Also, they must make the commitment to perform fiduciary duties to best of their abilities. They should have the inherent ability to learn what they need to know and be in a role where they can take the time to do so. There may be voting and non-voting members; permanent and non-permanent members. Investment committees are typically comprised of senior members of HR, finance and operations, with an odd number of voting members to avoid a tie. Employees representing various departments or business units may also be included in a non-voting capacity to share their input (and to be advocates within their respective departments of the plan and investment committee). When included as members, investment advisors, consultants, and/or legal counsel are typically included in a non-voting capacity. Another consideration is whether to include board members in the investment committee. It is important to evaluate whether such individuals have the time to devote attention to plan issues, and that they possess the relevant expertise and knowledge. When employer securities are present, there may be possible insider knowledge issues FOR PLAN SPONSOR USE ONLY - 2 -

3 Investment Committee Best Practices - Checklist Selection and interaction of members: Establish investment committee charter to formally establish rules, conduct and expectations of committee and its members. Areas to address: Purpose Roles and responsibilities Membership Meetings Authority of committee Limit number of voting members to three to seven individuals. Committees that are too large may be unwieldy and have difficulty getting things objectives accomplished. Select a diverse collection of members from varying backgrounds, levels of experience and age. List members by title rather than name to facilitate continuity. Identify length of time that members are expected to serve. Choose a strong leader to head the committee. Encourage a climate of equality. Members should be enabled and willing to question, debate and voice opinions. Include an advisor or consultant in a non-voting capacity. Avoid appointing members as form of reward. Members should formally accept the position (along with the duties described in the plan document and charter) in writing. Provide orientation program for new members. Elements of the training should include: Fiduciary duties, Plan documents, Plan procedures and Service providers Encourage regular attendance of meetings. Establish rules of order or adopt Roberts Rules of Order. FOR PLAN SPONSOR USE ONLY - 3 -

4 Investment Committee Best Practices - Checklist Meetings: Meet at least annually. Have the agenda initially determined by the chairperson. Each committee member should have opportunity to place items on the agenda. What is the priority and amount of time allocated to such matters? Set an annual agenda (e.g. review of investment performance, required regulatory approvals). Provide sufficient information to compare performance of investments with data or benchmarks used in the investment policy statement. Provide meeting information in advance to provide for through review and meaningful participation. Document any members disagreement with significant committee actions. Keep minutes with accurate accounts of decisions and deliberations. Review minutes from prior meeting at each subsequent meeting for approval. Create and maintain a centrally-located and easily-accessible audit file with all applicable documentation. Discuss whether plan is operating successfully (e.g. high level of participation, prudent investing). FOR PLAN SPONSOR USE ONLY - 4 -

5 About Strategic Retirement Group, Inc. Strategic Retirement Group, Inc, (SRG Consulting) is a retirement plan investment consulting firm specializing in the healthcare and not-for-profit sectors. Launched in 2006 by 20-year not-for-profit and healthcare expert David Hinderstein, SRG Consulting has built a reputation for best practices, high levels of service, and impactful communications that exceed client expectations and lead to awardwinning results for our clients. Since its founding, SRG Consulting has developed a client base of over 30 retirement plans with $1.5 billion in total assets as of September 30, We focus on educating fiduciaries, HR/Finance staff, and employees so that they can make the best decisions about their retirement program. 3 Barker Avenue, 5 th Floor White Plains, NY (914) David S. Hinderstein, AIF dhinderstein@n-r-p.com Daniel R. Casella, CFP dcasella@n-r-p.com FOR PLAN SPONSOR USE ONLY - 5 -