Workplace retirement plans, such as a 401(k) or pension plan, often have a lengthy list of rules and regulations. An investment committee often determines how to manage those retirement plans. Learn the role and investment committee plays in retirement and investment planning.
What Is an Investment Committee?
An investment committee governs and oversees an investment plan or strategy. Sponsored retirement plans may need an investment committee. However, their influence stretches beyond retirement plans. For example, a corporation may appoint a committee to oversee company investments.
The members of an investment committee can be drawn from the company’s board of directors. The committee may work with the company’s Chief Investment Officer to shape investment policy. However, with qualified retirement plan or pension plan, the plan sponsor may draft a charter detailing committee selection. Meanwhile, it may address the number of people who can serve on the committee at any given time.
Members of an investment committee may not require financial or investment expertise. The size of the committee can vary greatly. For example, some require just a handful of members. Others have dozens. However, investment committees must choose members dedicated to investment oversight.
Investment Committee Duties
The members of an investment committee have certain responsibilities and duties they’re expected to carry out. Those duties include:
- Establishing investment policy: One of the most important roles of the investment committee is creating a written statement of investment policies. This policy doesn’t necessarily outline what investments will be made. However, it dictates how to manage a plan and how to choose managers. Also, it determines the benchmarks that measure performance.
- Oversee the implementation of investment strategies: After finalizing the investment policy statement, the investment committee’s decides how to implement polic. For instance, the CIO or plan sponsor may make recommendations for a fund manager. Then, the investment committee can review and approve them.
- Track investment performance: The investment committee chooses investments, sure. But, more importantly, it measures how well those investments perform. A committee compares the performance of an investment strategy against the benchmark it’s attempting to meet or surpass.
- Conduct financial reviews: At least once per year, the investment committee should review the financials of its retirement plans or investment companies. This can give the committee a sense of the plan or company’s overall financial health.
Members of an investment committee may have additional duties. However, it depends on how the committee is structured. But these four responsibilities are at the core of the committee’s work. It protects the interests of those who participate in an investment plan.
Why Is an Investment Committee Important?
Investment committees do different things but it all comes back to one thing: helping the plan achieve its investment objectives. Having an investment committee to support the CIO of a company or a retirement plan sponsor is like having a fresh set of eyes to offer perspective.
The investment committee’s job is to take an objective look at what the plan or investment company is trying to do and help build a strategy to support it. Essentially, having a committee creates a system of checks and balances that are designed to promote responsible investing.
Investment Committee Best Practices
When it comes to carrying out its duties, there are certain do’s (and don’ts) that can make an investment committee successful. With no universal standards for such committees in place, professionals recommend these best actions:
- The role and responsibilities of the investment committee should be clearly defined in the investment policy statement or the committee charter.
- The committee should clearly understand the goals and objectives of the investment portfolio or plan it’s overseeing.
- Committee members should understand the process and standards for choosing or terminating investment managers.
- Members should be willing to ask questions about topics or subjects they don’t understand and/or question policies they don’t necessarily agree with.
- The investment strategy adopted by the committee should outline both risk and return potential.
- Committee members should take care to avoid potential conflicts of interest.
- The committee shouldn’t be too large to be unmanageable, nor too small to allow for a diverse group of opinions and viewpoints.
- Committee members should be rotated in and out regularly, with outside help from consultants called in when necessary.
- An investment committee should ensure that it understands and adheres to all legal regulations under ERISA.
- The committee should properly and accurately document all of its activities.
Again, they can set flexible guidelines. But those rules can be useful to companies and plan sponsors for setting appropriate boundaries and expectations when establishing an investment committee.
The Bottom Line
An investment committee provides support for plan sponsors and investment companies. Members take on certain responsibilities to help create a sound investment strategy. That’s reassuring both for the companies and individual investors whose investment plans rely on them.
- Consider talking to a financial advisor about how to investing in your 401(k) or a similar plan, or how to plan for retirement if you don’t have access to a retirement account at work. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- If you participate in a 401(k) or similar retirement plan at work, it’s a good idea to review your account annually. Check your contribution rate. Try saving at least enough to get the full company match if it exists. Review individual investments to see how well they performed over the past year and what you’re paying in fees. Consider increasing your contribution rate or making investment adjustments if you’re angling for better returns.
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