Of all the responsibilities an investment committee will undertake, none is as important as the selection of investment options offered to plan participants.
Here are three best practices for this important responsibility:
1. The investment policy should lead the selection of investment options, not be created after the fact. If you’re going to have procedures in place that say, “here’s what the criteria that defines how we select an investment, and for when we would remove an investment,” that policy should be created before the investments are chosen. If you already have a plan, after creating a formal investment policy, you should carefully evaluate the investments already within the plan to ensure they meet the criteria outlined.
2. When deciding the number and type of investments to offer in the plan, it’s important to consider several key factors that include:
- Size of plan
- Employee demographics: age of group, education, income, and so forth
- Employees’ understanding of investment concepts
- Plan’s ability to monitor investment performance
- Suitability of investments for the particular needs of the plan
3. Understand that the ongoing review process is just as important as the due diligence implement during the selection process.
Although committees are not judged based on an investment’s performance, they do retain the responsibility to oversee the fund’s investment performance and monitor investment practices – this means reviewing the investments regularly and documenting all decisions to keep, remove, or replace an investment – as well as the reasons behind those decisions.
This article is just one in a series on Best Practices for Investment Fiduciaries.
