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Pilot David Fisser spends a lot of time making sure his
company's 401(k) plan has the right stuff.
In fact, when Fisser walks through the airport, it's common
for pilots to approach him and offer investment advice. "They aren't shy about giving
their opinion," Fisser, 52, said.
The reason his colleagues give him an earful of investment
tips is that Fisser is a member of the Southwest Airlines Pilots' Association (SWAPA)
401(k) plan investment committee. The investment committee's responsibility is to design a
plan and monitor it to ensure that it meets employees' needs. But this doesn't mean every
suggestion an employee makes can be implemented. Fisser, a Southwest Airlines pilot for19
years, recounts that the committee took a pass on one captain's suggestion to offer his
favorite Japanese fund, because it was too specialized.
If you're in a 401(k) plan, it probably has an investment
committee. Here's a behind-the-curtains look at what an investment committee does and how
it impacts you.
What The Committee Does
In essence, the committee creates a plan investment policy
and carries it out. That seems simple enough, but the real job is in the details.
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"Any employer that sponsors a
401(k) plan has a fiduciary responsibility to have an investment committee."
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- Paul Neeson
Manager
Human Capital Advisory Services
Deloitte & Touche LLP. |
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One thing the committee does is set up procedures to ensure
that it's acting prudently.
"Any employer that sponsors a 401(k) plan has a
fiduciary responsibility to have an investment committee," said Paul Neeson, manager,
Human Capital Advisory Services with Deloitte & Touche LLP.
Some older 401(k) plans might have been set up without
these committees. These employers may want to consider forming a committee.
Basically, the committee has to prove that it had sound
reasons for choosing a fund and keeping it.
"Say a committee selected some fund and the fund
manager one day took all the money and disappeared in the Bahamas. If the committee never
checked the fund manager's background, they would likely face fiduciary risk," said
Scott Lummer, chief investment officer for 401k Forum, LLC, an on-line provider of
investment advice. mPower Inc., the parent company of 401k Forum, LLC, publishes this
site.
The committee is responsible for creating an investment
policy that outlines the 401(k) plan's investment strategy. That strategy may include what
type of funds the plan wants to invest in, such as value funds, growth funds, bonds, etc.
The policy also spells out the plan and each fund's risk
tolerance and expected returns, says Trisha Brambley, president of Resources For
Retirement Plans Inc.
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"If you have a plan with nothing
but aggressive funds available, that's not an adequate array of funds. You want to provide
your participants with an array of funds that covers a good cross section of asset
categories."
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- Trisha
Brambley
President of Resources
Retirement Plans Inc. |
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"If you have a plan with nothing but aggressive funds
available, that's not an adequate array of funds. You want to provide your participants
with an array of funds that covers a good cross section of asset categories," she
said.
That's why 401(k) plans often offer a diverse group of
funds, from conservative bond funds to aggressive growth stock and international funds.
"Pilots, in a lot of cases, are really
aggressive," said Fisser. Knowing that, SWAPA chose investments that are aggressive
as well. "These guys say, 'I fly jets for a living. I don't do bonds,'" Fisser
said.
But, in keeping with the need to be prudent, SWAPA does
offer its members an intermediate bond fund and a stable value fund.
The investment policy may explain how funds are
benchmarked. In benchmarking, funds are measured against other funds making similar
investments or against a published stock or bond index. And the policy should likely spell
out how funds are selected or removed, if not performing up to standards.
For instance, a policy may call for comparing a fund's
five-year performance to the five-year performance of the S&P 500 index. That allows
for an otherwise good fund to have the occasional bad year.
The committee also determines the terms and conditions of
the 401(k) plan. This includes when employees are eligible to join, whether a company
matching contribution is made, how often it is made, and how much it is. The committee
also develops rules about withdrawals and whether the plan will accept rollover
contributions from other plans.
"We institute things when we think there are gaps in
the services to our participants," SWAPA's Fisser says.
Who Is On The Committee
The investment committee typically is made up of senior
managers. Often, the chief financial officer and head of human resources are committee
members. If the company has union workers, a union representative may be on the committee.
The SWAPA investment committee is a little unusual in that
rank-and-file union member volunteers run it. But, two out of three committee members have
MBAs. Fisser says he has something that may be just as valuable, which compensates for his
lack of formal training. "I have a file cabinet full of a lot of papers that were
worthless investments," he said, adding that he learned from his mistakes.
How They Do Their Job
The first and foremost responsibility of the investment
committee is to "act in the best interest of the plan participants," Brambley
said. That's what it means to be a fund fiduciary.
Often the investment committee meets several times a year
to decide policies and conduct fund reviews. Any policy changes are typically passed on to
the company board of directors and CEO.
Most of the time, committee members have little prior
experience in managing 401(k) plans. They learn how to do it on the job, Lummer said.
"As a result, there are some plans that are put together very well and there are some
plans (where) the lack of experience … shows," he said.
For that reason, many investment committees hire a
consultant to help them do their job, Lummer said.
What A Committee Means To You
As a plan participant, you have the right to request a copy
of the investment policy and minutes of committee meetings.
"If there aren't properly documented minutes from the
meeting, a participant might have a legitimate complaint that members of the committee
aren't meeting their responsibilities," Neeson said.
If you aren't happy with the committee's work or would like
to see your investment choices changed, you can contact the committee members and let them
know.
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"The fiduciary part doesn't
bother me that much. Flying an airplane with 142 people is real responsibility."
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- David Fisser
Southwest Airlines pilot
Member of the Southwest Airlines Pilot
Association 401(k) investment committee |
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If it's difficult for you to imagine approaching senior
managers to talk about retirement policy, remember that they participate in the same plan
and would also benefit from an improvement such as greater investment choices.
Fisser said he gets lots of feedback from pilots, simply
because he's one of them. "Most people know who we (the committee members) are. We
get feedback on a weekly basis," he said.
Ultimately, if you think your investment committee isn't
acting in your best interest, you may try to sue the committee for not fulfilling its
fiduciary responsibilities.
Fisser puts his responsibilities in perspective: "The
fiduciary part doesn't bother me that much. Flying an airplane with 142 people is real
responsibility," he said.
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