Tuesday, October 23, 2007

Investment Policy Statements for Defined Contribution Plans

Presented at the Association for Financial Professionals (AFP) National Conference in Boston, MA

Panelists Include:

Marlow Kee
Director of Finance

Linda Ruiz-Zaiko

Monday, October 22, 2007

Benchmarking Your Defined Contribution Plan Costs

Presented at the Association for Financial Professionals (AFP) National Conference in Boston, MA

Panelists Include:

Brad Vollmer CFA
Assistant Treasurer
Sun Microsystems, Inc.

Sue Wuthrich
Director, Global Benefits
Google, Inc.

Linda Ruiz-Zaiko

Sunday, June 3, 2007

Building a Viable Investment Committee

Marlow Kee, CPA
Director of Finance

Barbara E. Williams, CFA
Managing Director
Bridgebay Financial, Inc.

Building a retirement investment committee takes significant planning on the part of the plan sponsor. An investment committee is responsible for the structured review and analysis of a retirement plan and the investment options that are offered to employees.

ERISA mandates that in structuring plans, the investment committee be at the heart of questions about providing the best investment choices that meet the needs of the plan participants. ERISA qualified plans mean the plan sponsors act as plan fiduciaries making decisions and adopting the perspectives and methods in a prudent manner.

This is especially true in choosing investment plan options as few plan sponsors employ only one person who could take on the function of “prudent expert” in selecting, monitoring and replacing investment funds for their retirement plan.

As a result, building an investment committee is the best way to protect and serve the plan participants because it provides a rational approach with different viewpoints for fiduciary decision-making. In selecting and removing an investment option from the plan, a committee approach is the most disciplined way to make these changes.

It’s important to realize that ERISA mandates that individuals who are fiduciaries are personally liable for their decisions. That personal liability is not easily delegated to another person and in many cases not covered by insurance. The “prudent expert” rules require fiduciaries to make sound and “right” decisions and that usually requires engaging in an appropriate process with multiple viewpoints.

Structuring the Investment Committee
Effective investment committees take into account advance planning in the form of a written committee charter that establishes the basis for all committee operations and includes by-laws and operating procedures. This is in addition to having an Investment Policy Statement (IPS) to govern how the committee selects and monitors investment choices.

The committee charter should identify the roles of committee members such as:

  • Which committee members have a vote?
  • What committee members provide specialized input but do not actually participate in committee decisions?
  • What are the responsibilities of the chairperson?
  • How will members of the committee be appointed and for what length of time?

Each committee member is a co-fiduciary with all of the other members of the committee and can greatly impact the committee’s dynamic and ability to perform effectively. The committee should ensure that all relevant materials are sent to the committee members well in advance of regularly scheduled meetings. Additionally the committee should engage experts in certain investments to present at the meetings to ensure that the committee is aware of its fiduciary responsibilities. As “prudent experts”, fiduciaries are judged not on the outcomes of their decisions but on the prudence of the process they used to reach those outcomes.

A committee member’s co-fiduciary status makes all choices very important. Often a plan sponsor will choose individuals who hold specific responsibilities as employees in the organization such as employees from finance (for financial expertise), human resources (for a benefits oriented perspective) and rank and file employees (for an overall participant perspective). Although these individuals may be appropriate from a plan sponsor perspective, they may be inappropriate from a fiduciary perspective. ERISA mandates that fiduciaries must:

  • Operate exclusively in the best interests of the plan and its participants and to provide the benefits described in the plan documents
  • Perform as “prudent expert”
  • Diversify plan assets to minimize the risk of large losses
  • Must select investment options so participants can structure investment portfolios appropriate for themselves
  • Abide by the terms of the written plan documents

Having committee members who understand these obligations and are willing to put aside their personal, as well as employer-related interests, is critical for determining who should be on the committee. Sometimes, the best committee members are not necessarily the ones who are at the top of the organization, such as the CEO’s, CFO’s or COO’s, as their committee presence may place them in the awkward position of having to choose between their obligations as a corporate executive and their obligations as a fiduciary member. Also, having rank and file committee members on the committee will only be beneficial if they have some knowledge of the plan and they are willing and able to do the preparatory work for meetings. If they are only on the committee to obtain employee buy-in or improve employee relations, then they are not appropriate members for the committee.

The Investment Policy Statement
The Investment Policy Statement (IPS) is also an important part of the fiduciary responsibilities of an investment committee. An IPS is a legal document designed to describe the goals and strategies the investment committee will adhere to when selecting, monitoring and replacing investment managers of funds. Drafting an Investment Policy should involve a discussion of the duties and obligations of the committee members, the specific committee process for adding and changing managers and the objectives of the decision making process. The IPS should not be too restrictive or too lenient in terms of making the investment decisions. For example, mandating that all investments must return a stated amount over a specific benchmark every year would restrict the universe of funds or managers considered and not take into consideration other equally important criteria including manager strengths, volatility, expense ratios and style analysis.

How many funds should a plan offer? This is a continuing issue in plan design and no set number is always the correct number. Demographics of the plan participants and diversification are key. A starting point for all plans is to offer domestic equity funds, fixed income funds and stable value options. In addition, a target retirement or lifecycle fund is helpful in allowing the participant to choose one fund based on his retirement age which will diversify his assets. The more difficult decisions for the committee are which additional types of funds should be available such as international funds, junk bonds, emerging markets, REIT’s and convertible funds. Based on the fiduciaries’ understanding of the participants needs, these questions are dealt with at the investment committee meetings.

Implementing an Effective Investment Committee
The key to maintaining a productive investment committee is to hold regularly scheduled meetings which follow a pre-set agenda with all members present and willing to participate in an educated discussion. Most committees have a chairperson to ensure the topics are covered in a timely and organized manner. Since the committee and each of its members function as fiduciaries and must abide by the “prudent expert” standard, a record of all its discussions should be made and the meeting minutes preserved to record the committee’s actions. The minutes can also be used to demonstrate that a prudent process was followed in regards to adhering to the IPS. For example, a “watch list” can be established for investment options that fail to meet established criteria and the committee can monitor this list regularly and take action on underperforming investments.

A useful fiduciary checklist for investment committee members is as follows:

  • Members are prepared and understand their responsibilities
  • Committee meets regularly and maintains documentation pertaining to its investment decisions
  • Committee considers the needs of all participants when making investment options decisions
  • Committee has prepared an Investment Policy Statement and ensures it is properly executed
  • Committee follows a consistent due diligence process in selecting investment options
  • Committee periodically reviews each investment option and all fees and expenses associated with the plan

Evaluating the Success of the Investment Committee

The key to sustaining an effective committee is to maintain a consistent process that regularly reviews the needs of the participants, current market conditions, industry trends, changes in pension law, and developing IPS goals. As the demographics of the work force evolves, the needs of the participants change. A younger work force will be more interested in long-term growth investments and an older work force will be more willing to invest in income-oriented investments. This means the investment committee has to continually ask how its decisions will affect the participants. Changing market conditions also are important to monitor as a steadily growing economy may mean participants want plan options that will allow them to structure a more aggressive portfolio.

Current industry trends could include the recent development of target retirement funds that provide an asset allocation based on the time horizon a participant has until retirement. Changes in pension law could mean that plan sponsors could now offer Roth 401(k) plans as well as traditional 401(k) plans. In Addition, strategies should be continually reviewed to ensure that they are aligned with IPS goals.

A successful investment committee is one that has been structured in a thorough manner with a clear understanding of the plan’s goals and objectives. An effective committee schedules regular meetings with advance notice and takes into account the changing needs of the participants, the markets, the industry and the IPS goals. Above all, a successful investment committee puts aside the personal biases held by its members and does what is prudent for the participants in the plan.

Wednesday, April 25, 2007

Default Investment Options (QDIA)

Presented at the Western Pension and Benefits Council Conference in San Francisco

Panelists include:

Sue Wuthrich
Director, Global Benefits
Google, Inc.

Marlow Kee
Director of Finance

Mary Ellen Mullen, CFA
Bridgebay Consulting, LLC