The defining trait of a successful investment committee is the ability to make prudent decisions. The best decisions are typically made as a result of asking critical questions, considering viable alternatives and coming to a consensus on the path that is in the best interests of the plan participants based on the best information available.
Despite general consensus from research on management and decision-making dynamics that diversity improves creativity in decision-making, as well as successful outcomes on those decisions, investment committees have remained relatively narrow and uniform in how they are constructed.
Popular guidance on investment committees often focuses on representation from management, finance and human resources. It often discourages naming "regular" employees as voting stakeholders on the committee, as they are viewed broadly as lacking certain fundamental knowledge of investments and markets to do the job effectively.
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While investment expertise is undoubtedly valuable and necessary, a committee that fails to consider a diversity of voices can fall victim to other types of problems.
In an April 2017 paper, Vanguard Research examined a number of committee behaviors that stand in the way of decision-making success, including the following symptoms of lack of diversity:
• Groupthink: When a group values conformity or avoids conflict to the point where it stifles creativity.
• Confirmation bias: When a group overvalues information that confirms preexisting viewpoints, rather than seeking out alternative viewpoints.
• Shared information bias: When a group falls back on information that is already known by the group.
• Herding: When the group avoids what is considered to be unconventional thought, preferring to adhere to mainstream conventions at the risk of standing out.
The common theme among these symptoms is that when a group is too comfortable, ideas often fail to be challenged and the group becomes complacent. "Diversity" in this context can be defined a number of ways, including by age, race, gender, educational and experience background, relevant skills, representation from multiple departments in an organization and more.
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No matter the type of advisory or management arrangement a retirement adviser has with a 401(k) plan, it is the investment committee that is ultimately responsible for ensuring the overall health of the plan. Even in the case of a total or near total outsourcing of its responsibilities, the committee still must take responsibility for the decision to outsource, to select and monitor those who take on the fiduciary role in its stead, and to evaluate whether the best interests of participants continue to be met. A group that does not resemble the population it represents will have a harder time understanding the needs of that population.
Likewise, if the participant population feels that there is an uncrossable chasm between themselves and the decisions being made on their behalf, the greater chance there is for dissatisfaction to arise when results do not match expectations.
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As other types of organizations and management structures have become more proactive about diversity initiatives, the results have proven to be positive. It would stand to reason that this is an underexploited area that's ripe for improvement as part of the fiduciary process.
As the most experienced and knowledgeable confidant of the plan, the adviser can add value by helping to ensure that the committee's composition, as well as its operating policies and procedures, are structured for optimal decision-making.
Promoting diversity initiatives and introducing a clear protocol to weigh diversity factors alongside leadership and investment skills is a way to introduce soft values that may yield tangible results. At the very least, expanding a committee's definition of who is a suitable committee member can help with participant engagement, which is also to the benefit of overall plan health and success.
Blaine F. Aikin is executive chairman of Fi360 Inc. and CEFEX.
