The survey, “Group Decision-Making: Implications for Investment Committees,” conducted by Vanguard Investment Counseling and Research, found committees for defined contribution (DC) plans in particular spent almost 51% of their time on past performance—more than all other issues combined..
“We found that committee members spent more time on things they can’t control, like past performance of investments, and less time on things they can control,” Catherine Gordon, principal and head of Vanguard Investment Counseling and Research, told PLANSPONSOR. “Committee members need to achieve a clarity of understanding on a variety of factors such as transparency, the role of a fund in the plan, investment strategy and fund performance over the long term. Understanding the differences between certain kinds of funds, say an index fund versus an actively managed fund, is important as well.”
About half of those surveyed said their committees tended to experience ‘confirmation bias’. That is, they sought information that confirmed their preconceptions of a topic. “Confirmation bias can be a real concern for committees, especially if committee members come prepared with opinions and not facts,” said Gordon. “Decisions can be made solely on how persuasive a member was.”
Gordon said that since half of those surveyed confirmed this bias, there is “clearly an opportunity to improve decisions by addressing this troublesome bias.”As to why committee members get bogged down in confirmation bias, Gordon told PLANSPONSOR, “It’s not unique to just them. As human beings, we’re all prone to it. And in the investment world, given all the data available on TV and the Web, it’s easier than ever to construct a rationale for our decisions. It is imperative to admit that such a bias exists so that steps can be taken to avoid it. The chair or head of the committee needs to maintain a balanced discussion of the issues. Consultants can be brought in for an outside perspective, but the committee chair can also go so far as assigning members to do pro or con research on a topic.”
Other findings of the survey suggest committees are using some best practices:
- Virtually all respondents felt their committees engaged in healthy debate before making decisions;
- More than 90% of respondents felt they were free to question group decisions without fear of criticism;
- More than 90% felt they used the expertise of all committee members; and
- The majority of respondents used a consultant as an outside expert.
The survey also found the size of the committee itself could be either positive or negative. A range of six to 10 members was considered ideal. Of those surveyed, 52% fell within this range. Fewer members than six reflect a possible lack of diversity of thought, said Gordon, while more than 10 members make committees potentially unwieldy and inefficient.
Overall, Gordon told PLANSPONSOR, the key to having an effective investment committee is making sure that members have a broad understanding of the issues involved. “Committees should set aside time, at least once a year, for education and training of new members on legal, legislative, investment and fiduciary topics,“ she said. “Making the time now enables committees to better defend their decisions later.”The survey polled more than 110 committee members, about half of which had a committee tenure of five years or less. A PDF of the survey can be downloaded from here.