Romance and a Good Pension Plan

Global financial markets may be zigzagging but sales of candy and flowers remain brisk ahead of the February 14 holiday. While some may not have a Valentine's Day celebration on their calendar, it's still nice to be reminded about the power of good relationships, whether focused on family, friends or both.

Gifts are always nice of course but careful financial planning is an important way of being kind to our loved ones throughout the year.

I recently heard Jane Bryant Quinn speak about her new book entitled "How to Make Your Money Last: The Indispensable Retirement Guide." During the Question and Answer period (and on her website), she talked about the advantages of adequate preparation for later years. After spending considerable money on her late husband's care, when she was ready to remarry, she asked her then beau to purchase long-term care insurance prior to completing their nuptials.

According to "How Couples Can Resolve Their Biggest Fights Over Money," (Wall Street Journal, April 12, 2015) budgetary nuts and bolts can be a touchy subject and hard to address when family members disagree on goals and spending habits. At the same time, being financially responsible is seen as a good trait to have.

It's not just individuals who need to adapt to changing circumstances. Investment companies must recognize that family structure has changed dramatically over time in order to deliver value-added services. In its 2014 "LoveFamilyMoney" study, Allianz describes multiple types of family structures and the related impact on goal-setting. In its 2013 research study, "Family & Retirement: The Elephant in the Room," Merrill Lynch and Age Wave find that only 29 percent of respondents regularly talk about family financial issues.  

It is hard to come up with an action plan, absent dialogue. Emphasizing the personal in "personal finance" could go a long way to getting family members to sit around the proverbial kitchen table and talk about how to afford life goals like college, retirement, buying a house or caring for an older parent.

February 2 Hearing On New Fiduciary Bill

Grab the popcorn. At 10 am EST on February 2, 2016, the Education and Workforce Committee of the U.S. House of Representatives will live stream its hearing on H.R. 4293, the Affordable Retirement Advice Protection Act. Click here to access the website if you want to watch the hearing in real time. Click here to download the text of H.R. 4293.

The event promises to be lively. Already, industry whisperers portend an expedited 50-day review by the Office of Management and Budget ("OMB") instead of its customary 90 days of this well-watched legislation. (The U.S. Department of Labor ("DOL") sent its Conflict of Interest Rule - Investment Advice, Regulation Identifier Number ("RIN") 1210-AB32, last week.) Click here to download various proposed text.

Some still question the costs associated with compliance. According to "Bills to Replace DOL Fiduciary Rule to Get Marked Up on Tuesday" by reporter Melanie Waddell (Think Advisor, January 29, 2016), the U.S. Chamber of Commerce would like the OMB to ask DOL to rethink its economic analysis of the rule's impact. Stephen Ellis with Morningstar estimates that adhering to the fiduciary standard could cost $2.4 billion or twice the "$1.1 billion price tag" that shows up in official studies. See "Morningstar Details DOL Impact" (Think Advisor, February 1, 2016).

Others think this new mandate, if passed into law, is long overdue. Read "Fiduciary rule could make 2016 good for investors" by Mark Miller (Reuters, January 7, 2016).

Whatever happens tomorrow, there are more headlines to follow.

ERISA Investment Committee Governance

For those who missed the January 27 webinar entitled "ERISA Plan Investment Governance: Avoiding Breach of Fiduciary Duty Claims," click here to download the slides for this educational program. There were three presenters, each of us sharing a different perspective about this important topic. I spoke about economics and governance. Executive Rhonda Prussack (Berkshire Hathaway Specialty Insurance) provided information about ERISA fiduciary liability insurance. Attorney Richard Siegel (Alston & Bird) offered his takeaways for investment committee members as the result of recent litigation decisions.

As with most discussions about fiduciary considerations, there never seems to be enough time to address core concepts. So it was with this Strafford CLE event. Ninety minutes quickly came and went. Here are some of the highlights from my talk.

  • Expect more surveillance of ERISA investment committee decisions. A $25+ trillion retirement money pot and regulatory developments are two reasons. Just a few days ago, the Office of Compliance Inspections and Examinations ("OCIE") of the U.S. Securities and Exchange Commission ("SEC") emphasized conflicts of interest and disclosures as two components of its Retirement-Targeted Industry Reviews and Examinations Initiative.
  • It is a good idea to regularly review the Investment Policy Statement for each plan and either revise asset class limits or rebalance to reflect material changes such as rating downgrades of securities owned, changes in company ownership, large reported contingencies that could adversely impact cash flow or corporate recapitalization.
  • Consider crafting a companion Risk Management Policy Statement or beef up the risk sections in the Investment Policy Statement(s).
  • Document the process that dictates how new investment committee members are selected, whether they are trained (and by whom) and how they are reviewed, by whom and how often.
  • Consider installing a central figure or team to negotiate all vendor contracts and clarify exactly who does what. The goal is to avoid an expectation gap that arises when a contract is ambiguous or silent on tasks that an investment committee needs to have done but a service provider does not want to do or thinks it is not obliged to perform. 
  • Double check the compensation of investment committee members to minimize the risk of conflicts of interest. Suppose for example that a Chief Financial Officer ("CFO") sits on an ERISA plan investment committee at the same time that he is eligible for a bonus if he can cut costs.
  • Engage ERISA plan counsel to put together a "kick the tires" team of economists and attorneys who can render an objective assessment of existing internal controls, governance structure and investment policies and procedures and then recommend changes as needed. 

As with any exercise in good stewardship, taking (and documenting) relevant precautionary actions can be a good defense for an ERISA plan investment committee, especially at a time of heightened scrutiny.

Chief Retirement Officer Redux

Skittishness about an individual's financial ability to retire is one factor that I believe underlies continued ERISA litigation activity. As I suggested to Wall Street Journal reporter Anne Tergeson, "'There has been quite a focus on the retirement crisis which has created significant nervousness about this gigantic pool of' 401(k) money and whether it is being managed properly." See "Lawsuit Alleges Anthem 401(k) Plan Exposed Participants to Higher Fees," January 8, 2016. (As an aside, I am not involved in this litigation and did not comment on this case for the article.)

Perhaps these same jitters about retirement readiness explain why some might consider the installation of a Chief Retirement Officer. Senior ERISA attorney Stephen D. Rosenberg writes that this idea is "so simple...and so brilliant..." in his commentary entitled "What Can a Chief Retirement Officer Do for You?" (December 9, 2015). In my piece about the same topic, I countered that hiring this kind of C-level executive may still prevent ERISA puzzle pieces from snapping easily into place. In "Chief Retirement Officer and a Seat at the Table," I cite the challenges of finding someone knowledgeable enough to navigate complex issues that transcend law, corporate finance, human capital enhancement, governance and investment management. I further question whether a Chief Retirement Officer would help or hinder the work of a Chief Risk Officer if one exists.

Stirring the pot further, Dr. Richard Glass, president of Investment Horizons, shared with me his view that a Chief Collaboration Officer may be a smarter move. Such a person would have a "primary duty" "to break down corporate and consulting silos." His view is that "These silos prevent the successful implementation of talent management (including engagement efforts) and business strategies and thus the level of profitability." Coincidentally, I spent nearly an hour on the phone today in a lively discussion about how to adjust enterprise value to reflect defined benefit plan underfunding. Earnings, share price and overall corporate worth is impacted by ERISA plan economics.

A "silo mentality," as defined by BusinessDictionary.com, is "A mind-set present in some companies when certain departments or sectors do not wish to share information with others in the same company. This type of mentality will reduce the efficiency of the overall operation, reduce morale, and may contribute to the demise of a productive company culture." A reasonable person could quickly conclude that a failure to communicate across functions is fraught with problems. Using case studies and her knowledge of anthropology, prominent Financial Times editor Dr. Gillian Tett makes the case for getting rid of organizational walls in her 2015 book entitled The Silo Effect: The Peril of Expertise and the Promise of Breaking Down Barriers.

Fortunately, there is a solution as long as corporate management has the will to create a unifying vision and motivate management teams to work towards common goals. Forbes contributor and management consultant Brent Gleeson adds that people must be properly incentivized and that goals must be measurable. Read "The Silo Mentality: How to Break Down The Barriers" (October 2, 2013) for more of his insights.

Applied to ERISA plans, the temptation to hoard information is ill-advised. If true that corporate power grabs exist and impede the ability for investment fiduciaries to carry out their duties, a Chief Retirement Officer might not have the clout to coalesce competing interests. Unlike a Chief Risk Officer who reports to a corporate board to ensure her authority and independence, a Chief Retirement Officer would likely wear the hat of fiduciary and have to put participants' interests ahead of those of shareholders. (The plot thickens when plan participants are contemporaneously shareholders by virtue of investing in company stock as part of a 401(k) line-up.) I defer to ERISA attorneys to address the separation of fiduciary "church and state" but could see someone crying foul if a Chief Retirement Officer communicates too often with company directors. Interested readers can download "Pension risk, governance and CFO liability" by Dr. Susan Mangiero for comments about two-hat conflicts. (Note that my work affiliation is Fiduciary Leadership, LLC.)

One step in the right direction towards effective pension governance is to appoint fiduciaries who have different backgrounds and can therefore facilitate a thorough discussion of various and important topics around the unifying theme of duty and care. Other ingredients of a well-baked set-up include having sensible metrics in place to assess whether fiduciaries are doing a good job. Rewarding them when they step around silos to make better decisions is likewise needed.

Whether a Chief Retirement Officer can assist here is unclear. Surely more discussions about this role make sense.

Chief Retirement Officer and a Seat at the Table

Credit to retirement industry executive Steff C. Chalk for his article entitled "The Advent of the Chief Retirement Officer" and to senior ERISA attorney Steve Rosenberg for sharing his insights on his blog. The notion that a C-suite executive (or a government equivalent position) should be installed to oversee all things related to benefit plans merits consideration, especially if a plan's fiduciaries are short on time and/or expertise or have a conflict of interest.

According to Mr. Chalk, another advantage is that the Chief Retirement Officer ("CRO") can negotiate vendor contracts "for the prudent oversight of fees, services and all plan related expenses." He references ERISA litigation in his mention of a "professional purchaser." Attorney Rosenberg is more emphatic when he writes that those cases that make it to summary judgment often unpeel the fiduciary breach onion to reveal actions that were taken "with limited discussion, limited knowledge and with a limited investment of time." (As an aside, and from my perspective as an expert witness who has worked on both plaintiff and defense cases, there are lots of situations where fiduciaries have acted with care and diligence. Facts and circumstances must be thoroughly evaluated.) 

The challenge - and I think it is a big one - is to find someone who possesses knowledge and experience in a variety of areas such as law, Human Resource strategy, investment management and governance. Then there is a question about reporting lines. Should a CRO properly report to the Board of Directors (or in the case of a government fund, report to the Mayor or Governor)?

Regarding compensation, Mr. Chalk asks whether linking a CRO's pay to performance makes sense. His suggestion is that an appropriate performance metric be something that reflects retirement readiness of plan participants. At first blush, this sounds good but could be called into question if exogenous factors make it hard for a CRO to deliver. Factors such as family circumstances, age, risk tolerance and education can drive seemingly inappropriate retirement investment decisions made by individuals even when copious education has been provided by a sponsor to defined contribution participants. For a defined benefit plan, what if an actuary or consultant provides misleading information (such as lowballing lifespan) and a sponsor discovers down the road that participant benefits are at risk? Is it right to tag the Chief Retirement Officer with that mistake?

Something not addressed by either gentleman but near and dear to my heart is the idea that retirement plans should be overseen by the Chief Risk Officer (if one exists at an organization) as part of enterprise risk management. Headlines are replete with news about the adverse impact on the sponsor, whether corporate or government, when there are problems associated with one or more retirement plans offered by the employer. Capital may become more expensive, if available at all. There could be a liquidity crisis that soaks up cash that would otherwise be used to invest in shareholder wealth creation or provide municipal services. Reputation risk could increase. Costly litigation may follow. The diminution of employee benefits could lead to a loss of talented staff or make it hard to attract new workers. I have written and spoken about this interconnectivity at length. Links to a few of my articles are provided below:

With an expectation of "when" and not "if" an enhanced fiduciary standard will get passed into law, a discussion about the advantages of hiring a Chief Retirement Officer are timely. 

Espresso Math and Retirement Plan Fees

Year 2016 promises to continue the inspection of fees charged to retirement plan sponsors and participants, in part because it is such an important topic. Also there is considerable litigation in this area that appears unlikely to abate any time soon. According to Groom Law Group, "Nearly forty lawsuits have been commenced relating to 401(k) plan fees." Court documents reveal that other lawsuits focus on fees paid by government pension plans and ERISA defined benefit plans, respectively. Earlier this year, it was reported that litigation risk is a key concern of defined contribution plan executives. In the public sector, a confluence of political pressures, funding deficits and cash squeezes are forcing fees and transparency to the top of the list for trustees. I wrote about the case of Rhode Island a few months ago. Missouri, New Jersey, New York and Ohio promise to rally the fee flag.

I will be addressing the topics of fees and investment risk assessment with co-speakers on January 13, 2016 as part of "Life After Tibble: Investment Monitoring and Litigation Defense Considerations for ERISA Fiduciaries" and again on January 27, 2016 as part of "ERISA Plan Investment Committee Governance: Avoiding Breach of Fiduciary Duty Claims."

What is less clear for the New Year is whether fee disclosures by various plan sponsors will be similar enough in nature to compare and contrast. When reporting standards vary across organizations, the result can be a confusing melange of numbers that cost a lot to put together but don't help the user. Besides ambiguity, unexplained price bounces can be likewise hard to grasp.

On a more quotidian level than the heady universe of retirement plans, I recently learned that fuzzy price math can pop up from time to time. I stayed at a hotel that offered complimentary breakfast except for my daily double espresso. That would be extra. What I soon discovered was that the pricing varied by day and who came to my table. One morning, the bill showed $5. The next time, the server whispered that he would not charge me. On the third day, I ordered a triple and was asked to pay $12. When I queried for an explanation, he shrugged his shoulders and blamed his boss. I could understand something in the neighborhood of $5 to $7.50 but $12 made no sense. I could have ordered two double shots at $10 and poured half of one cup out. When told that his manager was in a meeting, the waiter simply changed the bill to $8. I acquiesced and left for my appointment. On the last day, a new server comped the Italian drink. I left puzzled and bemused but no more wiser about how the prices were set, by whom and on what basis.

The moral of the story is that one does not always know how much he or she will be charged for something. This can be frustrating and make it hard to budget.

For the plan sponsors that do a terrific job in vetting fees and communicating this information to participants, keep up the great work. For those in need of improvement, there's no time like the present to get started.

ERISA Plan Investment Committee Governance Webinar

Back by popular demand, a panel of esteemed speakers will present on January 27, 2016 about the fiduciary risks and litigation trends faced by ERISA investment committee members. Sponsored by Strafford Publications, Inc. and eligible for Continuing Legal Education ("CLE") credits, the program is entitled "ERISA Plan Investment Committee Governance: Avoiding Breach of Fiduciary Duty Claims."

Faculty speakers include:

  • Dr. Susan Mangiero - Managing Director with Fiduciary Leadership, LLC;
  • Ms. Rhonda Prussack - Vice President and Fiduciary Liability Product Manager with Berkshire Hathaway Specialty Insurance; and
  • Richard Siegel, Esquire - ERISA attorney with Alston & Bird.

The panel will review key issues such as those listed below:

  • What are the ERISA regulations with which investment committees must comply?
  • How should plan sponsors vet fiduciary risks when selecting an investment committee?
  • What litigation techniques can be implemented to minimize the likelihood of a finding of breach of fiduciary duty by an investment committee?
  • What is the role of the economic expert in assessing investment committee performance and investment monitoring, post-Tibble?
  • What is the role of ERISA fiduciary liability insurance?

Inasmuch as many ERISA lawsuits cite the entire investment committee as defendants, there is a need for each member to understand her personal and professional liability as well as the risks that arise if other members are ill-prepared, are conflicted and/or lack sufficient knowledge and experience. In other words, a best practice is for the entire committee to recognize the seriousness of fiduciary obligations and behave accordingly.

Investment Rate of Return Assumptions Matter

It's no secret that a house needs a strong foundation to weather storms. In a similar sense, the financial health of a pension plan depends on structural strength. The amount and timing of obligations to retirees as well as the rate of return ("ROA") on investments are two determinants of a pension plan's ability to meet its obligations in a timely fashion.

Trouble occurs when realized returns turn out to be significantly smaller than expected investment-related inflows and contribution levels are too low as a result. Playing catch up is hard to do once an employer realizes that a pension plan is underfunded due to anemic asset returns. That's one of the reasons that more defined benefit plan sponsors are asking whether the historically popular annual eight percent rate still makes sense. According to Credit Suisse senior analyst David Zion, company earnings can take a serious hit if "long-term expectations for pension returns turn out to be too bullish." (See "Are Pension Forecasts Way Too Sunny?" by Jason Zweig, Wall Street Journal, January 28, 2012). 

The possible outcomes are no less dire for public pension plans. In a November 6, 2015 press release, Connecticut's Treasurer, Denise L. Nappier, applauds recently proposed changes by Governor Malloy to better fund the nearly $30 billion Connecticut Retirement Plans & Trust Funds but warns that a drop in the assumed ROA from 8.5 percent to eight percent is not enough and that 7.5 percent or lower "would be more in line" with what can reasonably be obtained. She adds that "Clearly, it stands to reason that setting return assumptions at levels more likely to be attained will strengthen the financial health of the funds over the long term." On October 5, 2015, the Wall Street Journal described a bleak outlook for Connecticut municipal workers without a major overhaul to how its retirement plans are funded. In "Connecticut, America's Richest State, Has a Huge Pension Problem," readers are told that "unfunded pension liabilities more than doubled over the past decade to $26 billion..."

In a September 2015 paper entitled "The state of public pension funding," American Enterprise Institute scholar Andrew G. Biggs explains that the amount of risk being taken is equally as important as a gap between the assumed ROA and actual portfolio yields. Worsening deficits have resulted in numerous plans taking on more risks with an increase in the percentage of risky assets from sixty-four percent in 2001 to seventy-two percent in 2013. These are large numbers. When one factors in what appears to be an emerging trend in private employer sponsored retirement plans, to be managed by states, there is legitimate concern about whether states and cities are taking on too much risk. Refer to "Retirement options dwindle and states step in. But should they?" (CNBC, November 6, 2015).

The question remains as to which retirement "house" can stand steady on its feet. Getting answers soon is key.

Investment Monitoring, Post Supreme Court Decision

As mentioned in "ERISA Litigation and Investment Monitoring" (October 22, 2015), Dr. Susan Mangiero, Attorney James Fleckner and Dr. Lee Heavner will discuss economic and governance ramifications of the U.S. Supreme Court "Tibble" decision on December 3, 2015 from 11:00 am to 12:30 pm EST.

To register for this educational webinar entitled "Life After Tibble: Investment Monitoring and Litigation Defense Considerations for ERISA Fiduciaries," click here. The sponsor, Bloomberg BNA, has arranged for continuing legal education ("CLE") credits to be offered.

Educational objectives are listed below:

  • Identify the main tenets of the Tibble decision and understand the implications of likely future litigation and enforcement;
  • Distinguish investment monitoring done in-house or by third parties;
  • Discover preemptive measures for effective investment monitoring;
  • Learn how to mount a defense against lawsuits; and
  • Cover the components of economic damage estimates as part of an investment monitoring lawsuit or regulatory enforcement action.

Given the importance and relevance of the topic, there are numerous individuals who can benefit by attending this program such as:

  • Asset manager and financial service company attorneys;
  • Auditors;
  • Banks that sell to ERISA plans;
  • Corporate board members;
  • Corporate counsel;
  • ERISA fiduciaries;
  • ERISA fiduciary liability insurers;
  • ERISA litigators;
  • ERISA transactional attorneys;
  • Financial analysts;
  • Financial regulators;
  • Financial industry journalists;
  • Investment advisors and consultants;
  • Mutual fund directors;
  • ERISA plan policymakers; and
  • ERISA plan researchers.

Dr. Susan Mangiero Earns Certified Fraud Examiner (CFE) Credential at a Time When Global Fraud is Estimated at $3.7 Trillion Per Year

Dr. Susan Mangiero, financial expert and author, has earned the Certified Fraud Examiner (CFE) credential from the Association of Certified Fraud Examiners (ACFE), having successfully met the ACFE’s character, experience and education requirements for the CFE credential, and having demonstrated knowledge in four areas critical to the fight against fraud: Fraudulent Financial Transactions, Fraud Prevention and Deterrence, Legal Elements of Fraud and Fraud Investigation. Dr. Susan Mangiero joins the ranks of business and government professionals worldwide who have also earned the CFE certification.

According to its recent comprehensive study, the ACFE estimates that the average organization loses roughly five percent of revenues each year to fraud. This translates into an estimated worldwide loss of $3.7 trillion every twelve months. CFEs on six continents have investigated more than 1 million suspected cases of civil and criminal fraud.

Dr. Mangiero is currently a Managing Director of Fiduciary Leadership, LLC and lead contributor to Pension Risk Matters and Good Risk Governance Pays. Dr. Mangiero has served as a testifying expert and behind-the-scenes forensic economist on multiple investment and financial valuation and risk assessment matters. She is a CFA® charterholder and holds the Financial Risk Manager (FRM®) designation. In addition, Dr. Mangiero has earned the Accredited Investment Fiduciary Analyst™ professional designation from Fiduciary360. She has received formal training in investment fiduciary responsibility and is certified to conduct investment fiduciary assessments.

About the ACFE

The ACFE is the world’s largest anti-fraud organization and premier provider of anti-fraud training and education. Together with more than 75,000 members, the ACFE is reducing business fraud world-wide and inspiring public confidence in the integrity and objectivity within the profession. Identified as “the premier financial sleuthing organization” by The Wall Street Journal, the ACFE has captured national and international media attention. For more information about the ACFE visit ACFE.com.

About Fiduciary Leadership, LLC

Fiduciary Leadership, LLC is an investment risk governance and forensic economic analysis consulting company. Clients include asset managers, transactional attorneys, litigation attorneys, regulators and institutional investors.