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Is it a Good Idea to Have Rank-and-File Participants on the Investment Committee?

As a NAPA member, you should be very familiar with the term procedural prudence. The term is the cornerstone to an understanding of a fiduciary standard of care. I associate procedural prudence with three requirements; the fiduciary must show:

• the details of their decision-making process;
• that decisions were based on generally accepted investment management practices; and
• that decisions were made in the best interests of participants.

It’s the third requirement – the best interests of participants – that I would like to address.

Aristotle identified prudence as the ability to understand the perspectives of others — being able to see another person’s point of view. Therefore, the duty to be prudent raises two interesting questions for 401(k) plans:

• Is it a good idea to get the perspective of rank-and-file participants by having them serve on the investment committee?
• Can a plan sponsor be certain that it is being prudent if rank-and-file participants are not actively involved with the investment committee?

When ERISA was enacted 40 years ago, corporations were largely structured on a centralized command and control hierarchy — decisions were pushed from the top down. In turn, the function and role of the investment committee was based on a similar structure. Senior executives were appointed and delegated the responsibility for deciding what would be in the best interests of all participants.

What passed as leadership 40 years ago is no longer effective in the workplace. Participants want to speak for themselves and feel that they are actively contributing and participating in meaningful work. It’s not just a Gen X or Gen Y thing; it’s a change that is evident across all age groups.

At a recent TRAU session I asked advisors how many have included rank-and-file participants on their investment committees, and there was a scant show of hands. Then one advisor spoke up and said that her clients don’t really trust their participants. Ah-ha! My point exactly. If the C-suite doesn’t trust their employees, you can bet the employees don’t trust the C-suite. And if there is an environment of distrust, you also can bet that the 401(k) plan is not going to be effective. Before a plan sponsor can be an effective fiduciary, it first must be an effective leader.

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