Board Members – You might be on the hook for more than you thought.

Board Members – You might be on the hook for more than you thought.

Investment Committees and Boards of Directors as Fiduciaries of Retirement Plans.

Recently, we met with the executive director of a non-profit organization to review the benchmark and fiduciary process analysis we performed on their 403(b) plan.  During our conversation, he paused, took a breath and said, “This is really powerful information, and clearly we have significant improvements that need to be made.” Although we completely agreed, there sounded like there was a “but” in there somewhere…and we were correct.  He continued to say “But, how am I going to get the members of the board on the same page so we can make the necessary changes and what will keep us from ending up in this position again in three years?”.

He is right to be concerned.  Being a member of a board or investment policy committee is a big responsibility.  Members commonly are considered fiduciaries with respect to the organization’s retirement plan, meaning they have a legal obligation to ensure the plan level decisions are in the best interest of the participants.

For participant-directed plans, like 401(k) and 403(b) plans, the investment fiduciaries have the responsibility to prudently:

• Select the investment options
• Monitor those options
• Remove a fund when it is deemed necessary, and replace the fund if needed

In addition:

• Together, the options must constitute a “broad range”
• The options and the plan’s services must be suitable and appropriate for the participants
• The costs of all services for the plan, including the investment expenses, must be reasonable

The standard to which their decisions are held is the Prudent Expert Rule – which requires that investments be selected:

“. . . with the care, skill, prudence, and diligence . . . that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. . . .”

It’s all about the process

Many of the issues we see could be fixed if there was a written policy in place for the board or committee to reference.  In many instances, we find the boards and committees are comprised of highly intelligent, committed individuals, however, they are not investment or qualified plan experts.

An effective written policy should: 1) Be written in language that can be understood and followed by a non-investment professional. 2) Be well defined, but not so restrictive that it can’t be reasonably adhered to 3) Include a monitoring schedule that compares results against established benchmarks. By having that process in place and following it, the group removes the guesswork, limits liability and increases efficiency. The document that details the process is called an Investment Policy Statement or IPS.

According to the Center for Fiduciary Studies:

An Investment Policy Statement (IPS) is a written document with the purpose of providing meaningful direction and guidance for trustees and investment professionals regarding the selection and management of investment assets based on established and documented investment goals and objectives. When used properly, this document can limit liability, provide consistency, and set expectations for investment performance.

By preparing a written IPS, the fiduciary can: 1) avoid unnecessary differences of opinion and the resulting conflicts; 2) minimize the possibility of missteps due to lack of clear guidelines; 3) establish a reasoned basis for measuring their compliance; and 4) establish and communicate reasonable and clear expectations with participants, beneficiaries, and investors.

Once an IPS is implemented, the role of the committee or board is no longer one based on opinion or guesswork. A well crafted IPS document is written in plain language so that an average person, who is not an investment expert, can follow it as a guide. From a practical standpoint the group now knows exactly what they should be receiving and reviewing from vendors on a quarterly and annual basis and they should have an easy to follow procedure to see if any changes are warranted. The IPS itself is a living document and should be periodically reviewed to see if it is working as intended and adjusted accordingly.

If your organization is board-centric or utilizes an investment committee for your qualified retirement plan and you do not have a written, clear process for plan monitoring and evaluating; it’s a good time to begin that discussion.

There has been more focus on fiduciary responsibility with respect to 401k and 403b plans in the past year than ever before with the passing of a new Fiduciary Rule by the Department of Labor this past April. The good news for your board or committee is, although it takes some work to establish a well written and documented prudent process, it makes the job of those in the group easier, helps limit their liability, increases the effectiveness of the plan and often reduces costs. All well worth the effort in our opinion.