Let’s suppose you’ve recently been appointed to an investment committee. You’re looking forward to thoughtful and thorough discussions that will form the many decisions you’ll need to make during your tenure. As you’ll soon find out, at the core of your committee’s responsibilities is protection—making sure your committee is “doing the right thing.”
Now, doing the right thing is a fiduciary duty, one as important as solid investment returns—if not more so. You’ll find a ton of detail about fiduciary duty and fiduciary requirements in Vanguard’s Duty, opportunity, mastery—Investment committee best practices, but it’s worthwhile to summarize the four key features that should characterize the fulfillment of your fiduciary duty.
“Exclusive benefit.” Any organization that sponsors a benefit plan—whether it’s a pension, 401(k), profit sharing, or other qualified retirement plan—should already know that plan assets exist, as we know from ERISA, for the exclusive benefit of plan participants. For nonprofits, the fiduciary concept and duty are the same, but expressed differently, such as “duty of care,” “duty of loyalty,” and “duty of obedience.”¹ (Good dog!)
Exclusive benefit means plan assets should never be a source of investment in someone’s favorite project, in a “hot” strategy, or in a preferred asset class—for example, a hedge fund or private equity. Investment committee members must be aware of not just rationalizing these kinds of investments but also of how certain allocation moves or spending would look to an impartial, outside, or other observer. The key point about exclusive benefit? Plan and nonprofit assets should be employed with just one goal in mind: to meet the return and risk goals of the participants or the identified entity, such as a pension plan or a nonprofit endowment or foundation. That’s it, and that’s enough.
Prudence. This old-fashioned word is another way of saying do the right thing, just as an intelligent and knowledgeable person would. However, what prudence doesn’t mean is that the outcome has to be perfect—only that your approach and efforts are in line with what other thoughtful people would do. Prudence may argue against going too far afield from what your peers are doing, or stop a committee from investing in something beyond its capabilities—and which would likely be questioned if it doesn’t go well. It’s not a compliment to be called too clever when discussing an ill-planned investment decision.
Do what you say you’ll do. Proper due process should lay out guardrails to help your committee stay within the boundaries of what is prudent. This includes an investment policy statement and procedural elements for meetings and decision-making. Adhere to them. If they prove to be out of date, update them. Don’t just override them without proper thought and documentation, or you can jeopardize your focus on exclusive benefit and prudent decision-making. Process is key.
Document, document, document. If bad things happen and questions are asked, having a paper trail is fundamental to determining whether you’ve fulfilled your duties as a committee member. Documentation doesn’t just mean meeting minutes, but also key material that you and other committee members relied upon to arrive at decisions (think handouts and exhibits), and an explanation of the logic of the move or moves the committee decided to make while other choices were passed over. Not only is documentation useful in a crisis, but it provides a map of past decisions for new members that help them learn what knowledge is required, how previous decisions were made, and the committee’s processes.
From what you’ve read so far, it would be easy to think this is all there is to fiduciary responsibility and requirements. The Department of Labor would beg to differ, although this blog offers a short overview of key concepts. I hope it has whet your appetite to learn more about, or consider a more thorough review of, fiduciary requirements. Doing so will serve you well as an investment committee member.
¹National Council of Nonprofits, “Board Roles and Responsibilities,” 2017.
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