Investment committee guide: Duties, best practices and resources
Investment committee guide: Duties, best practices and resources
Investment committee members bear a tremendous responsibility. Indeed, their actions can directly impact the individual members, participants and beneficiaries they represent. Bound by an ethical and legal obligation, members must act in the best interest of the organization or group. Understandably, new committee members may find the role intimidating but it can also be uniquely rewarding.
If you’re considering (or newly appointed to) a role on an investment committee, you likely have a few questions. But first, congratulations! You have been entrusted to make important decisions that have the power to improve people’s lives. Whether it be 401(k) participants or foundation beneficiaries, doing research like this shows you’re up for the challenge and taking your responsibility to the group seriously. Certainly, each person impacted appreciates your diligence. So let’s get started.
In this blog, we’ll share what you need to know about investment committees. To start, we’ll answer some background questions like: What is an investment committee? Who is on it? What does it do? Next, we’ll offer tips and best practices for success. And finally, we’ll share resources, sample investment policy statements and committee charter examples for further exploration.
An investment committee is the group of people responsible for managing an organization’s investments. The committee oversees investment policies, advisor selection, strategy and fund performance to ensure the best possible outcome for the members or beneficiaries.
What kinds of funds do committees manage?
401(k) or 403(b) retirement plans
Why are investment committees important?
Institutional investors have a fiduciary duty to act in the best interest of the organization they represent. By establishing a committee, the organization creates internal checks and balances while benefiting from a variety of perspectives, expertise and networks. Accordingly, this protects the organization from risk and often improves overall investment performance. Additionally, the committee shares the legal liability rather than making a single person wholly responsible.
Who serves on an investment committee?
The investment committee selection process varies from one organization to another. In private organizations, committee members may be appointed or volunteers. In these organizations, members may include employees from the executive team, HR, legal and finance.
On the other hand, investment committees in nonprofit organizations often comprise staff and volunteers. Ideally, these members have some financial or investment experience, but it is not required.
Investment committee duties
Selecting an investment consultant
In most cases, the members of an investment committee don’t have the expertise or time required to manage the organization’s investments in a way that meets the fiduciary requirements. Consequently, they need to select an investment consultant to help guide them.
For a newly formed investment committee, finding a consultant is the first order of business. There are a lot of options, so it’s important to take a data-based approach to selecting the right partner by issuing an investment management RFP.
Using a request for proposal (RFP) enables you to gather information about a firm’s people, processes and approach in an organized and standardized way. Then, your committee can score the RFP and select the consultant that offers the best fee structure, services and expertise to serve your members’ and beneficiaries’ needs. Many organizations issue their RFP for asset management digitally using an RFP management system to centralize workflows and automate RFP scoring.
Connect with an RFP expert help find the right investment consultant.
Creating and maintaining an investment policy
Any investment committee managing funds on behalf of their members, participants or beneficiaries should formalize their strategy in an investment policy statement (IPS).
While not required, guidance from the Department of Labor under the Employee Retirement Income Security Act of 1974 (ERISA) suggests that defining the investment policy provides guidelines for fulfilling the committee’s fiduciary duties. In addition, creating an investment policy statement ensures consistency, guides investment option selection and illustrates the committee’s thorough investment processes.
Some investment firms and consultants may provide investment policy creation or review in their services. According to a guide from Fidelity, your investment policy statement should cover:
A brief description of the purpose and objective of the defined contribution plan
The purpose of the investment policy statement
Objectives of the investment policy:
Provide structure for plan fiduciary decisions.
Clarify plan sponsor and committee responsibilities.
Articulate intention to comply with ERISA Section 404(c), including the rules regarding qualified default investment alternatives (QDIAs).
Describe the structure of the investment option menu.
Provide investment guidelines for the investment options.
Describe investment option evaluation criteria.
A note about investment committee charters
In addition to the investment policy, nonprofit organizations, foundations and endowments should also create an investment committee charter for plan governance. This guide from Diligent defines what a charter includes:
Authority and responsibilities
Expenses and compensation
Monitoring and managing investment performance
Ideally, during the investment consultant selection and policy creation process, the committee establishes investment performance benchmarks. Using these benchmarks, the investment committee should independently review quarterly reports from their investment consultant.
In addition, the committee should meet at least once a year to evaluate vendor performance, report returns and update the investment policy.
Assuming all is well and the investment performance meets expectations, the committee should reissue an investment RFP at least every three years. While it’s a lot of work, it’s important to verify your existing partner is still the best option available. On the other hand, if there are glaring issues or challenges with your investment partner, don’t wait to take action. You may need to consider issuing an RFP for a new partner if:
Your servicing team isn’t responsive or proactive
Firm turnover leaves your committee with an unknown or unqualified replacement
The advisory firm has been acquired
A recent request for pricing reveals your current pricing is out of line
Best practices for investment committees
Pick an odd number of members
Your committee should have an odd number of members to avoid voting ties. In addition, your committee size should reflect the size of your organization or fund to avoid inefficiency. Indeed, small organizations may operate most effectively with three members. On the other hand, organizations responsible for large funds may require nine or more members to manage the work and reduce risk.
Set and stagger terms
Large endowment and nonprofit investment committees may benefit from having members serve staggered terms. Usually members serve for two or three years. By setting a term length, the committee benefits from fresh perspectives of new members while staggered terms support continuity. But remember, onboarding takes time. So, fund stability and momentum should be considered before adopting this approach.
Ensure committee diversity
When considering new members, review the skills of the existing committee as a whole and evaluate how prospective members could fill gaps and create a well-rounded group. Large organizations can use a skills matrix to organize the information.
Educate new members
Investing on behalf of members, participants and beneficiaries is a tremendous responsibility. More importantly, investment committee members are personally liable if misconduct or negligence is discovered. Consequently, committee members should build and maintain an understanding of their fiduciary responsibility, the organization’s IPS, conflicts of interest, industry trends and committee processes.
Align investments with organizational initiatives
As customers demand meaningful change, organizations are increasingly focused on shifting spend and investments to align with social policies. Indeed, RFPs now frequently address issues like supplier diversity, sustainable sourcing and supplier codes of conduct. Similarly, investment committees may consider aligning with social initiatives by designating a portion of funds for impact investing.
Conducting vendor and supplier due diligence? Let's chat.
At RFP360, we’re seeing a major shift in the way organizations incorporate DEI and ESG initiatives into their investments and partnerships. Our customers leverage our platform to quickly gather information from vendors and suppliers about sustainability, diversity and compliance.
If you’re looking to better understand the impact of the groups you work with, let’s talk. We’d be happy to share our expertise on how to accelerate and document your social initatives.
Follow a meeting agenda
Building an agenda for committee meetings has several benefits. First, a preset agenda gives members time to review topics and prepare for discussions. Second, the agenda helps guide discussions, ensure efficiency and keep the committee focused. Finally, the agenda can be saved to document your meeting and processes.
Maintain an in-house fiduciary audit file
In the event that members, participants or beneficiaries have questions about the fund’s performance, it’s crucial to maintain meticulous records. From your RFP process to investment reporting, be certain that discussions, considerations and decisions are well-documented.
Get legal advice
Regulations and compliance requirements change regularly and vary widely in different jurisdictions. To protect your organization and yourself, seek advice from a qualified legal professional. Specifically, they should review your investment committee charter, investment advisor qualifications, policies and contracts.
When regularly investing large sums of money, it can be easy to forget that every dollar of a 401(k) or retirement fund belongs to a real person who worked hard for it. They put their faith in the investment committee to make the most of it. If you’re a committee member, consider placing an extra chair at the table during your next meeting to represent the people behind the fund — it’s a good way to honor their trust and make the work even more meaningful.