Investment Committee Best Practices – If a Prudent Decision Was Made and No One Documented it, Did it Happen?
If you are serving as a fiduciary for your employer’s retirement plan, you have a duty under the Employee Retirement Income Security Act (ERISA) to act prudently. Engaging in prudent behavior is only the first step a plan fiduciary should take, however. Equally important is for the plan fiduciary to be able to demonstrate at a future date when that decision-making process might be called into question that the fiduciary engaged in a prudent process. This is especially true with respect to the selection, monitoring, and retention of the plan’s investment alternatives.
You should not rely on memory or cobbled together notes and printouts from old discussions to demonstrate fiduciary compliance. Instead, best practices call for a well-structured, governed, and documented investment committee tasked with selecting and monitoring the plan’s investments.
Recommendations with respect to the committee include the following:
- The committee should be made up of individuals with the knowledge and expertise to make investment decisions.
- They should be empowered to hire investment professionals, if needed, as ERISA requires the fiduciary to act with the skill of someone who is an expert in the area of investments. Lack of expertise or knowledge is no excuse to fiduciary breach.
- The committee should have written bylaws that clearly set forth their duties and responsibilities.
- They should meet regularly (at minimum annually, but quarterly is recommended) to review and discuss the plans investments and performance.
- Most plans have an investment policy statement (IPS) that guides the investment fiduciaries through their investment selection and monitoring duties. Whether the committee has an actual IPS or not, they need to have clear guidelines that dictate their investment choices for the plan.
Perhaps you are already doing these things, but are worried it isn’t enough. You are likely aware that hundreds of lawsuits have been filed over the last decade or so, aimed at retirement plan fiduciaries, claiming that they breached their fiduciary duties to the plan and its participants. These claims usually relate to excessive service provider and investment fees and imprudent investment options. So, what more can you do to protect yourself from similar claims?
A good place to gain insights are the lawsuits themselves and the handful of related published opinions. In 2015, the Supreme Court stated that an ERISA plan fiduciary has a continuing duty—derived from the common law of trusts—to “monitor investments and remove imprudent ones.” See Tibble v. Edison International.
- Insight #1: Not only must you regularly review your plan’s investment lineups, you must REMOVE IMPRUDENT OPTIONS. The committee should establish a process for evaluating investments and include procedures and criteria for when the plan will remove investment offerings. Don’t just freeze the offering to new money. Remove it.
Relying on its decision in Tibble, the Supreme Court stated in the 2022 Hughes v. Northwestern University decision that merely providing investors with a broad menu of investment options does not excuse a fiduciary’s allegedly imprudent decisions. Offering prudent investment options alongside imprudent options may be insufficient.
- Insight #2: Don’t overload your plan with a vast menu of offerings believing more is better. More is just more and sometimes more can be worse. Have a policy for creating a sufficiently diverse investment menu with each offering meeting the plan’s investment criteria. Get rid of investments that do not meet that criteria.
Finally, a recent case to note at the district court level is Trauernicht v. Genworth. This case is one of the numerous copycat lawsuits that have been filed across the country claiming plan fiduciaries breached their duty as a result of including the “underperforming” BlackRock LifePath Index Target Date Funds in the plan. While seven district courts have granted the plan fiduciaries’ motions to dismiss, the twice amended Genworth complaint is the first to allow the case to move forward past a motion to dismiss.
Of note here, the court ruled that the participants raised a plausible inference of imprudence by alleging that (i) the plan fiduciaries’ procedures for monitoring the BlackRock Funds were inadequate because they failed to scrutinize their performance against appropriate alternatives; and (ii) the plan fiduciaries never discussed the performance of the BlackRock Funds. (Note that because this was a preliminary hearing, the court did not consider the facts offered to disprove the participants’ allegations.)
- Insight #3: The investment committee should always go through a diligent decision-making process and discuss the pros and cons of all investment options, including fees and historic investment performance. Equally important, always draft and retain meeting minutes that reflect IN DETAIL the committee’s decision-making process and be clear as to the reasons why an investment was included or rejected.
Clear and thorough documentation is the key to demonstrating that you acted prudently and is always your best defense. As the title of this article asks—If you do not document your prudent decisions, did they really happen?
If you want to better understand your fiduciary duties to your plan or would like help with your investment committee bylaws, policies, or minutes please contact any of Bricker Graydon’s Employee Benefits attorneys.