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  • Writer's pictureNicholas Zaiko, CIMA

Investment Oversight Best Practices

The employer-sponsored defined contribution (DC) plan now represents the primary retirement savings vehicle for most employees. The increased size, complexity and recent 401(k) plan litigation, demands greater scrutiny of the plan's investment options in addition to enhanced administrative oversight. These issues are not limited to the 401(k) plans but also 403(b) plans that are under ERISA and DoL.

Revisiting the Oversight Role

The increased significance of the role of the DC plan now demands additional expert focus on the investment options offered to the participants. The oversight structure should also adapt to consider the changing relationship between the plan sponsor and the service provider as assets in the DC plan grow. Additional services may be required as the plan grows and the service providers' ability to deliver those services in a cost-effective way must be evaluated. Failing to achieve enhanced services or reduced fees as a DC plan grows may result in an unintentional fiduciary breach on behalf of the plan sponsor as recent litigation has shown. The sponsor may also fail to meet its fiduciary duty to participants if the participation rates, investment selection and education programs are not closely monitored and maintained.

Investment Oversight

The most effective way to increase investment oversight is to include members of the treasury or finance departments in the plan oversight committee. This is an evolving trend that is spreading throughout the DC market. Since traditional pension plans or defined benefit (DB) plans directly impact the financial statements, the CFO or Treasurer are typically heavily involved in both the administration and investments in those plans. In contrast, the DC plan has had minimal impact on the employer's income statement and has historically been overlooked by the treasury group. Recent litigation on fees and fiduciary breaches have demonstrated that DC plans can have an adverse monetary impact the employer's finances. Employing the same robust oversight historically reserved for the DB plan to the DC plan will greatly enhance fiduciary compliance and minimize risk.

As plan assets grow, plan sponsors may consider retaining the services of an independent, retirement plan consultant that has the benefit of working with many different plan providers, investment funds/managers and plan sponsors. Many bundled 401(k) plans have relied on the affiliated investment consultant provided by the recordkeeper that is an employee of the recordkeeper's parent organization. Periodically, a plan sponsor should seek a deep-dive review of the investment recommendations by an independent third-party advisor to ensure that the investment line-up is best in class with reasonable fees.

The expertise of a retirement plan advisor will assist the plan sponsor in ensuring that plan fees and services are competitive with other plan providers. An independent consultant can also point out any deficiencies in the administration of and the investments in the plan.

The Plan Committee

Plan sponsors should pay close attention to the size and composition of their investment committee. The cornerstone of an effective committee is ensuring that all members represent experts in their particular field of focus. The best committees are well rounded, drawing from several different departments. Each member should focus on a particular area of the plan which aligns with their particular expertise and take the lead in major decisions. For example, the ERISA attorney should have greater direct input and authority on providing fiduciary and compliance advice. Similarly, the Treasury professional should focus on the investments, leaving legal compliance issues to the ERISA attorney. The administrative requirements of the plan should be provided by the benefits manager and Human Resources representative. Additionally, an advocate for the participants and employees should also provide input to the committee. Well defined roles and segregation of duties is crucial for an efficient and effective oversight committee.

The committee should be sufficiently small as to avoid getting bogged down in procedure and scheduling conflicts and allow sufficient time for proper oversight by each member. Exceedingly large committees may have problems assembling enough members at any one meeting in order to establish a quorum and thus inadvertently delay crucial plan decisions.

Investment vs. Administrative Decisions

Investment and administrative timelines tend to differ dramatically and can often conflict. Many challenges arise when trying to fit investment decisions into administrative timelines. The conflict may become so great, that investment decisions end up being made based on administrative pressures rather than investment priorities. These types of decisions can potentially represent breaches of the plan sponsor's fiduciary duty to the plan participants. For example, leaving an underperforming fund in the plan because of administrative restrictions after the committee has decided to remove or replace the fund may open the door to fiduciary liability. On the flipside, the plan investment policy should not be written in such a way as to rigidly trigger automatic action regarding a fund. The policy should reflect a structure of monitoring that involves the evaluation of numerous important factors. Any action taken regarding a fund should be reviewed and documented by the committee.

Investment Review Process

A well-designed and methodical investment review and search process is the hallmark of the top institutional DC plans. Any changes made to the plan should be done so in a well thought out approach which takes into account investment considerations. While administrative considerations are omnipresent, they should simply inform but never interfere with critical investment decisions. There are some steps that can be taken to reduce administrative burdens such as utilizing a multi-manager framework and using asset class specific funds. This makes it significantly easier to simply replace an underperforming fund with a similar fund with better performance. The best plan sponsors also have an established search process in case a fund change is required at any time, rather than relying on a pre-determined periodic review. This allows the committee to act swiftly in the case of an unexpected event. Though periodic review is important, searches should be conducted in response to external events and not simply be restricted by the calendar.


Now rivaling the traditional pension or defined benefit (DB) market in scale, DC plans have taken center stage in employees' retirement future. As such, professional, expert scrutiny of the investments offered to plan participants is becoming increasingly important. The plan committee composition and size are crucial to providing diligent and effective oversight in order to protect against fiduciary risk. Engaging the broad knowledge and specific expertise of an independent investment consultant to share the burden of co-fiduciary status affords the sponsor further protection and market insight. A detailed and methodical review and search methodology, coupled with a comprehensive pattern of documentation is the one of the best ways to fulfill the sponsor's fiduciary duties to the plan participants.

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