PSNC 2011: "Committeed" Relationships

Deciding what investments should be included in a retirement plan’s menu and monitoring those investments is a huge amount of risk and liability for just one person; plan sponsors need an investment committee.

Michael W. Kozemchak, Managing Director, Institutional Investment Consulting, told attendees at the PLANSPONSOR National Conference that as sponsors think about who should be on the committee, they should think about who might be a fiduciary to the plan already and move from there. Attila T. Toth, Principal, Portfolio Evaluations, Inc., added that for his clients, the committee usually includes representation from the finance and HR departments. He said most organizations don’t have committee members outside of the organization, unless it’s a company’s board.  

However, Doug Halman, Director of Finance, for the Indianapolis Art Center, which is a nonprofit still in the process of starting up its investment committee, said it struggles with the skill set of its current board, so it is trying to recruit outside folks with investment skills to serve on the board. The organization has targeted the owner of an investment advisory firm to come on the board and chair the investment committee, but the Art Center will also have someone from the finance department and audit department on the committee.  

Halman noted that sometimes individuals on other nonprofits’ committees will sign on to help an organization start its own.Toth added that committee members need to have liability insurance and they should make sure they have the right amount and right type of insurance. Kozemchak advised sponsors to have a third party take a look at the liability insurance policy to make sure the promised coverage is there. He said the right amount of coverage is plan specific, but typically it’s around 50% of plan assets. However, plans with company stock, for example, may need more.

Kozemchak also said that as sponsors think about staffing the committee, they should look for people that will show up and be prepared and involved. He recommended three to six members regardless of plan size.Toth made the distinction that some committee members are appointed, something that will be specified in the Investment Policy Statement. He also recommended having a committee charter that details members’ duties.  

Though his organization is in the early stages of putting an investment committee charter together, Halman said it will address conflicts of interests, identifying what conflicts there could be that would cause someone not to be eligible for the committee or that would cause them to be put off the committee.Kozemchak said the charter should also address the process for adding or removing members and the process for electing officers.

The consensus of the group is that committees need to meet quarterly. Toth recommended that committees not only look at the plan’s funds and how they are doing, but also talk about plan design features that are working or not working, and discuss disclosure obligations and plan communications. 

Kozemchak suggested committees review how funds are performing in relation to the IPS, and how the economy is doing. He noted that administrative tasks create headaches for plan sponsors more so than investments, so committees should get a report from the plan’s recordkeeper on what participants are doing and communications.  

Sponsors should aggregate all provider and consultant information quarterly. In addition, the committee may want the relationship manager from the recordkeeper there, or for a larger plan, the committee may want an investment analyst and communications specialist from the recordkeeper to be there. It may also want the plan’s consultant or adviser present.  

Special committee meetings might be called for major market events. As examples from the recent market crisis, Kozemchak says his clients that were invested in mortgage backed securities, securities lending, or stable value funds breaking the buck, had special meetings. They might also be called for issues with funds, a change in control such as when vendors consolidate, or a change in control at the sponsor – which would require a talk about employer stock funds.  

Toth noted that committees generally don’t include enough detail in their documentation. Kozemchak said documentation will include meeting minutes, the meeting agenda, all collateral material gathered before the meeting, and actions taken. Then, Toth added,the minutes should be circulated to all membersa few days after the meeting.