Public Plans For Private Sector Employees - Say Whaaat?

The news about public retirement plans for private workers may not be as snappy as a dog with red sunglasses taking a selfie but it sure caught my attention.

On June 17, 2014, Pensions & Investments reported that efforts are underway to "provide retirement security for all New Yorkers - not just participants in the $150 billion New York City Retirement Systems." In "NYC comptroller to launch advisory panel for retirement security," writer Robert Steyer tells readers that Chief Investment Officer Scott Evans will lead the group, with members yet to be appointed. The Nutmeg State is on the same glide path with its creation of the Connecticut Retirement Security Board. Michelle Chen of The Nation applauds this initiative while Bill Cummings of the Connecticut Post decries the costs that small business owners will bear if a mandatory offering occurs.

In "State-based retirement plans for the private sector" (August 6, 2014), the Pension Rights Center lays out legislative happenings elsewhere as part of a "movement afoot to use the efficiencies of public retirement systems to administer new types of pension plans for private-sector workers." The list includes Arizona, California, Colorado, Illinois, Indiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, Ohio, Oregon, Vermont, Washington, West Virginia and Wisconsin.

Certainly there is merit for any effort that helps to promote savings and financial independence. That said, there is a plethora of critical questions to be answered before any products are developed, let alone forced on taxpayers and employers. For one thing, who will serve as a fiduciary for each plan and what regulatory regime will prevail? ERISA does not extend to government plans. Will state trust law apply? Second, some of the aforementioned states are struggling with underfunded plans for municipal workers. If said deficits are revealed as the result of questionable investment and benefit mix decisions and/or limited oversight, does it make sense to put these same persons in charge of a new plan? Third, to the extent that state funding is used to install these new plans, how will fiscal policy change as a result? Fourth, are there true efficiencies to exploit and in what areas - investment, operational, technology, etc?

Maybe state delivery of private retirement benefits makes sense but I hope that a lot of important issues get vetted before too much big spending takes place.

Decision Making When You Don't Like Your Colleagues

As an independent economic consultant, I am fortunate to have flexibility as to project selection and the make-up of my team. From what I hear from colleagues, others don't feel as lucky. They tell me they feel stuck in a situation where they have important duties to carry out but do not necessarily trust or like their work mates. This could be dangerous, especially since plan fiduciaries are exposed to personal liability.

I've heard some say that you can dislike someone yet still have respect for their knowledge and integrity. Others suggest that you may want to break bread with an individual over lunch but want to avoid having to depend on their judgment about serious matters. I supposed the ideal is to both like and trust someone to be careful about things such as vendor selection, changing an investment line-up, freezing a plan and so on. When the perfect combination of sparkle, professionalism and gray matter is non-existent, what should a fiduciary do?

I haven't seen much on this topic about how to select someone to serve as a fiduciary of a pension fund with respect to their personality and integrity. One public plan trustee asked for my opinion about a committee on which he served. His concern had to do with what he deemed to be anemic attempts on the part of one of his colleagues to gather information about various asset managers and asset classes. His fear was that this person would vote "yea" or "nay" without a proper basis. I told him that his anxiety was far from trivial. Based on my experience, this gentleman was right to be scared. When a fiduciary breach complaint is filed, all past and present members of the investment committee are often cited as defendants. The notion is that the fiduciaries were making important decisions on a collective basis.

In my view, there is room for improvement as to how pension plan fiduciaries are selected, trained, monitored for appropriate performance and terminated, as needed. It wouldn't hurt to assess the friendliness factor of each candidate either. Not that everyone has to bond over Friday night pasta but the investment committee typically works as a team. It is important that the members of said team can have an open and meaningful exchange among one another, debate various topics in depth and decide what makes sense for participants thereafter. Speaking in plain language helps. See "Even Pension Board Members Can't Understand Pension Jargon" by Ari Bloomekatz (Voice of San Diego, September 5, 2014), for an interesting example of questions that fiduciaries are right to ask and the disparate level of investment knowledge reflected on a board.

If you have a good story to tell about investment committee dynamics, email contact@fiduciaryleadership.com.  

ERISA Pension Law Turns 40

Get out the party hats and horns. The Employee Retirement Income Security Act ("ERISA") turns 40 years old today. Signing this legislation into law on September 2, 1974, U.S. President Gerald R. Ford proclaimed a new era, noting that "the men and women of our labor force will have much more clearly defined rights to pension funds and greater assurances that retirement dollars will be there when they are needed. Employees will also be given greater tax incentives to provide for their own retirement if a company plan is unavailable."

Since 1974, change has not been a stranger. In her testimony before the ERISA Advisory Council on June 18, 2014, Honeywell in-house counsel Allison Klausner talked about greater mobility of the work force and a significant reliance on technology over time. The use of third parties was another area of emphasis. She added that "As ERISA turns 40, to effectively deliver 'benefits' (perhaps best stated as 'the delivery of support for the well-being of our workers and retirees') in an employer-sponsored system, plan sponsors find that it cannot be done without outsourcing some (or all) of the administrative and other work associated with and necessary to operate employee benefit plans."

Statistics about plan design paint a dramatic picture of change as well. According to the Private Pension Plan Bulletin Historical Tables and Graphs (U.S. Department of Labor, June 2013), the number of single-employer sponsored defined benefit plans fell from 101, 214 in 1975 to 43,813 in 2011. In contrast, the number of single-employer defined contribution plans rose from 207,437 in 1975 to 637,086 in 2011. As plan design preferences reflect demographic and economic shifts, they also present new challenges for fiduciaries.

For those who want to learn more about the history of ERISA and predictions of things to come, the American Bar Association and various co-sponsors are offering a free webinar on the topic. Click to register for "ERISA Turns 40: The Past, Current and Future State of Pension Plans," The event will be held on September 9, 2014 from 1:00 to 2:30 PM EST and will feature speakers from the U.S. Department of Labor and ERISA attorneys in private practice.

Foreign Corrupt Practices Act and Implications for Institutional Investors

For those who don't know, I am the lead contributor to an investment compliance blog known as Good Risk Governance Pays. I created this second blog as a way to showcase investment issues that had a wider reach than just the pension fund community. While I strive to publish different education-focused analyses on each blog, sometimes there are topics that I believe would be of interest to both sets of readers. A recent article that I co-wrote is one example. Entitled "Avoiding FCPA Liability by Tightening Internal Controls: Considerations for Institutional Investors and Corporate Counsel" (The Corporate Counselor, September 2014), Mr. H. David Kotz and Dr. Susan Mangiero explain the basics of the Foreign Corrupt Practice Act. Examples and links to reference materials are included, along with a discussion as to why this topic should be of critical importance to pension funds and other types of institutional investors. Click to download a text version of "Avoiding FCPA Liability by Tightening Internal Controls: Considerations for Institutional Investors and Corporate Counsel."

U.S. Supreme Court and Tibble v Edison International

According to SCOTUSBLOG.com, Glenn Tibble, et al. v. Edison International, et al ("Tibble v Edison") is seeing continued action after a petition for a writ of certiorari was filed on October 30, 2013 by counsel of record for the petitioners. Click here to download the 319 page document. On February 7, 2014, attorneys for respondents filed a brief in opposition. On March 3, petitioners' counsel filed a supplemental brief. Thereafter, on March 24 of this year, the Solicitor General was asked to file a brief in this ERISA fee case. That brief has now been filed and can be accessed by clicking here. (Thank you to Fiduciary Matters lead blogger, Attorney Thomas Clark, for sending the file.)

According to this 29-page "Brief For The United States As Amicus Curiae," the Solicitor General, the Solicitor of Labor and others conclude that the petition for a writ of certiorari should be granted with respect to the question as to "[w]hether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institutional-class mutual funds were available, is barred by 29 U.S.C. 1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed."

As an economist who leaves the legal issues for attorneys to vet, it seems that this filing opens the door to another review of ERISA matters by the U.S. Supreme Court. Whether that is good or bad, depends on your perspective. I would like to think that further discussions about fiduciary best practices by the highest U.S. court would be a positive outcome.

Brown M&Ms and Investment Service Provider Due Diligence

 

According to marketing guru Steve Jones, parties seeking to do business with one another can learn a lot from rock musician David Lee Roth. As explained in "No Brown M&M's: What Van Halen's Insane Contract Clause Teaches Entrepreneurs" (Entrepreneur Magazine, March 24, 2014), each of their agreements included a rider that was designed to force a promoter to pay attention to the band's true objective about ensuring safety. By adding what may have seemed like a silly provision about "melt in your mouth" candies being unwelcome, Van Halen was testing whether the promoter had read the contract in its entirety and was therefore more likely to install equipment properly. "If any brown M&M's were found backstage, the band could cancel the entire concert at the full expense of the promoter," leaving him or her with a possible loss in the millions of dollars.

In institutional investment land, there are intriguing parallels. For one thing, there is the safety issue. If a pension plan is poorly managed, beneficiaries may suffer. Second, if there is confusion or ambiguity about who is supposed to do what, when, how and at what price, there are likely to be disputes and economic consequences. There is a growing number of lawsuits and regulatory investigations that are scrutinizing service providers and/or the pension plan trustees who are tasked with diligently selecting them.

The developing market in outsourcing various services to a third party is yet another reason for paying close attention to the quality of engagement letters and vendor contracts. Earlier this year, the ERISA Advisory Council announced its plan to study "current contracting practices with respect to outsourced services, including provisions such as termination rights, indemnification, liability caps, service level agreements, etc. that might assist plan sponsors and other fiduciaries in negotiating service agreements."See "Outsourcing Employee Benefit Plan Services."

As someone who has done business intelligence research and trained investment fiduciaries and their advisors, I often hear the same frustration being expressed about a gap in expectations. Budget-strapped buyers want more for less. Consultants, asset managers and banks say they are searching for ways to satisfy their clients while still being able to earn a reasonable rate of return for their efforts. One solution is to streamline operations, to the extent possible, while acknowledging any fiduciary implications associated with prevailing law and governance standards. If cutting corners to preserve a profit margin ends up sacrificing requisite quality, trustees could be at risk of being investigated for anemic oversight of service providers. Vendors could be at risk for failing to deliver contractual services.

Based on my work for both defense and plaintiff counsel (depending on the matter and whether there is a counterclaim), a poorly worded agreement can be a potential trouble spot. Another hugely important issue is whether a service provider has self-identified as a fiduciary. An attorney or judge may categorize a particular service provider as a functional fiduciary even if a written contract is silent on that point. Trust counsel can play a critical role in assisting with negotiations before authorized persons sign on the dotted line.

ERISA attorneys David C. Kaleda and Theodore J. Sawicki address the issue of fiduciary status in a 2012 article for the National Society of Compliance Professionals. See "Should You Have a Formal ERISA Compliance Program?" In a recent discussion about the best practices for creating and adhering to service level agreements, ERISA attorney Howard Pianko expressed his strong view that there are numerous ways to ensure "plausibility" and still be able to hire affordable outside organizations to assist. He went on to describe the advantages of having a systematic mechanism in place such as the Six Sigma type model that his firm employs. Click to read about Seyfarth Lean. (Having earned a Green Belt in Six Sigma, I can attest firsthand to the upside of developing a process to control quality.) 

For those involved in the selection and oversight of service providers or the delivery of said services, ask yourself if you know as much about an existing or anticipated contract as you should.

A Pension Rock and a Hard Place

Not surprisingly, the conversations about pension reform are getting louder and taking place more often. Calls for further transparency, political posturing and headlines regarding the link between municipal debt service and questions about the contractual nature of pension IOUs are three of the many factors that are being hotly debated, with no end in sight. Interested parties are invited to read "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz, CPA. Published by the American Bankruptcy Institute, the authors bring attention to the fact that courts are making decisions about critical issues such as whether creditors, in distress, can move ahead of public pension plan participants. Click here to read more about the article and the connection between retirement plan promises and municipal bond credit risk.

Others are approaching the topic of public and corporate pension plan obligations from the perspective of younger workers being asked to subsidize seniors. In "Why We Need to Change the Conversation about Pension Reform" (Financial Analysts Journal, 2014), Keith Ambachtsheer writes that "Pension plan sustainability requires intergenerational fairness." He adds that suggestions such as lengthening the time over which an unfunded liability can be amortized or assuming more investment risk "effectively pass the problem on to the next generation once again."

Legislators are slowing starting to act, in large part because they cannot afford not to do so. According to Wall Street Journal reporter Josh Dawsey, New Jersey Governor Chris Christie has spent his summer with constituents, holding town hall meetings to explain his decisions about pension plan funding. See "Christie Plays Pension Issue Beyond N.J." (August 9-10, 2014). On August 1, 2014, he signed Executive Order 161 to facilitate the creation of a special group that is tasked with making recommendations to his office about tackling "these ever growing entitlement costs."

New Jersey is not alone. Prairie State politicos are attempting to forge reform. In "4 reasons you should care about pension reform in Illinois" (July 25, 2014, Chicago Sun Times reporter Sydney Lawson explains that the $175.7 billion owed to participants and bond investors will cost every taxpayer about $43,000 if paid today. According to its website, the Better Government Association estimates that replenishing numerous police and fire retirement plans in Cook County will "require tax hikes, service cuts or both."

The Big Apple retirement crisis  is no less massive. New York Times journalists David W. Chen and Mary Williams Walsh write that "the city's pension hole just keeps getting bigger, forcing progressively more significant cutbacks in municipal programs and services every year." A smaller asset base and decision-making that occurs across five separately managed funds are described as trouble spots for Mayer Bill de Blasio. Noteworthy is the mention of an investigation by Benjamin M. Lawsky, head of the Department of Financial Services, that seeks to understand how service providers were selected to work with New York City pension plans and the level of compensation they receive. See "New York City Pension System Is Strained by Costs and Politics" (August 3, 2014).

Curious about the extent of this New York City and New York State focused investigation, I asked one of my researchers to file a Freedom of Information Act request in order to obtain details. We are awaiting the receipt of meaningful results. So far, we are being told that information is not available to send. What is known so far, based on an October 8, 2013 letter from Superintendent Lawsky to Comptroller of the State of New York, Thomas P. DiNapoli, is that questions will or are being asked about retirement plan enterprise risk management and "[c]ontrols to prevent conflicts of interest, as well as the use of consultants, advisory councils and other similar structures."

Pandering for votes by promising lots of goodies may not be a successful recipe for reforming pensions that need help. Moreover, judges are in the driver's seat once a dispute about contractual status is litigated. In a recent opinion, a federal court of appeals ruling about lowering cost of living adjustments overturned an earlier decision that such an action was unconstitutional. See "Baltimore wins round in battle over police, firefighters pension reform" (The Daily Record, August 6, 2014). Click to download the August 6, 2014 opinion in Cherry v. Mayor and City Council of Baltimore, No. 13-1007, 4th U.S. Circuit Court of Appeals.

Like Homer's Odysseus who was caught between Scylla and Charybdis, policy-makers, union leaders and heads of tax groups are navigating some very rough waters indeed. We have not seen the end of these heated debates about what to do with underfunded municipal pension plans. Trying to align interests of seemingly disparate groups is only the beginning.

New is Not Necessarily Better and Could be Worse

Every now and then, my husband likes to remind me that older is better in terms of quality. His father's tools still get used, our washer and dryer from twenty years ago are in place and his 1989 Honda was only recently sold when I nudged him to buy a car with air bags. Incidentally, the CRV was sold with 400,000 miles to a neighbor who still drives it on a regular basis. I was reminded of his words when I read a New York Times article on the failure of "new math." More recently the concept that new can be counterproductive came to light when a meeting organizer insisted on using technology that was so "cutting edge" that a few of us could not join because we did not have the requisite equipment. As a result, we have to schedule anew, costing time that could have been avoided.

Applied to pensions, adding too much complexity by trying something untested and/or sold as "the next big thing" can spell trouble. As I wrote in "Investment Complexity Risk" (August 1, 2014), transactions that are hard to explain make it difficult for an investor to "appropriately identify the right benchmark to track performance." When that occurs, tasks such as portfolio rebalancing, assessment as to whether fees paid are "reasonable" and/or constructing an effective hedge strategy are difficult to achieve.

While "new" does not automatically mean "complex," the reality is that capital markets and service providers such as asset managers are increasingly dependent on one another. What happens with one organization can have a far-reaching impact on others. Consider Goldman Sachs Group Inc. ("Goldman"). Its plan to retract prime brokerage services to some hedge funds while increasing fees to those that remain as clients will impact the institutional investors that have exposures to asset managers that either need to look elsewhere for capital or will pay more money to Goldman. See "Goldman Sachs Cuts Roster of Hedge-Fund Clients" by Justin Baer and Juliet Chung (Wall Street Journal, August 4, 2014).

Some institutional investors are throwing their proverbial hands in the air when it comes to in-house management. Pensions & Investments reporter Douglas Appell describes a trend in seeking third party help as the result of "today's volatile markets." Refer to "Complexity of investments pushes funds to seek outsourcing help" (July 9, 2012). Asset managers are similarly outsourcing certain tasks such as performance measurement and attribution. According to "Managing complexity and change in a new landscape: Global survey on asset management investment operations" (Ernst and Young, 2014), partners Alex Birkin and Alan Fish write that "Firms are only beginning to realize the opportunity in outsourcing more complex processes."

Contracting others to augment one's core business is not bad or good on its face. Importantly, end-users must understand what they are buying and what may not be covered by the agreement. Based on my experience as a forensic economist and investment risk governance expert, disputes often arise when expectations - even those that are codified with a letter of engagement - differ. Ambiguous language is one culprit. In-house and external counsel as well as those tasked with dotting the due diligence "i's" can play a vital role in clarifying the terms of outsourcing. Similarly, attorneys can work with their institutional investor clients to ensure that a Request for Proposal ("RFP") questionnaire includes ample questions about the nature of the contracts in place between asset managers being considered and the vendors to said asset managers.

The principles of good contracting are tried and true. Some may sneer at old fashioned ideas but they have a place in one's investment risk governance toolbox. When the lights go out, a pencil has a lot more value than a computer that doesn't work.

Pension Governance Grill Lines

I am back from a health camp vacation in the Southwest and excited to blog anew. Besides walking unexpectedly into the path of a poisonous and large, scaly gila monster one night (a "what do I do now" moment I might add), I had a chance to attend a kitchen demo about how to grill seafood. In waxing poetic about equipment, the chef urged the audience to avoid pans that sit atop the stove and instead go for the real thing. He went on to say that substitutes for an outdoor barbeque were so inferior in his view that one might as well paint marks on the food.

Grins aside, applied to pension governance, truer words may never have been spoken. When I testified before the ERISA Advisory Council about hard to value investing, I described some of the best practices relating to governance, risk management and appraisals. My suggestion to those who took more of a hurried approach was to consider installing a comprehensive framework that would allow for checks and balances, appropriate delegation of duties and independent oversight. As I have said on numerous occasions, if that exists at your organization, take a bow. Communicate what that structure looks like. Interested parties will be glad to know.

The illusions of eating a faux grilled steak could dissipate with the first bite.

Jersey Boys and Working at 80

If you are looking for a few hours of musical fun and a good rags to riches story, I recommend Jersey Boys. I had the pleasure of seeing the stage production in Las Vegas last year. I liked it so much that I am seeing the Broadway show later this summer. The movie is equally fine although a theatrical aficionado may find the drama with music less exciting than music with a bit of drama. Besides the entertainment factor (and I give the film a thumbs up), the original endeavor and global touring companies continue to spin foot-thumping sounds into commercial gold. According to "'Jersey Boys' has been a windfall for all involved" by L.A. Times writer David Ng (June 21, 2014), worldwide grosses exceeded $1.7 billion in March with more than "20 million people in 10 countries," counting themselves as lucky audience members.

What you may find notable is that some of the talented contributors passed twenty-one a long time ago and yet demonstrate that one can keep working, if desired, for many years. Clint Eastwood was both a producer and director of the movie. He is eighty-four years old. Frankie Valli was an executive producer of the movie, helped to develop the stage deliverable and is still singing live at the age of eighty. Christopher Walken does a marvelous job as a celluloid version of Valli mentor, Gyp DeCarlo. He is seventy-one years old. Bob Gaudio, the magical hit-maker for the Four Seasons and member of the Songwriters Hall of Fame, has been front and center in the making of the play and movie. He is seventy-two years old.

These individuals are not alone in continuing their presence in the work force. Forbes staffer Halah Touryalai cited a Wells Fargo study that 30% of polled "middle-class American[s] believe they will need to work until they are at least 80-years-old in order to retire comfortably" but may not have the okay from employers. See "More American Say 80 Is The New Retirement Age" (October 23, 2012). New York Daily News reporter Heidi Evans refers to 80 as the "new 50." NBC News recently reported that creative seniors are setting up consulting practices, starting businesses, seeking jobs with non-profits or working part-time. See "Retirees Keep One Foot in the Workforce" by Shelly Schwartz (April 8, 2014). Great Jobs for Everyone 50+ by Kerry Hannon addresses opportunities by category such as snowbirds or retired teachers as does the AARP in its 2011 guidance for those who head south for sun when bad weather in winter looms.

Some say that age is an illusion in terms of what one can do. Famed wit George Burns is quoted as saying that "You can't help getting older, but you don't have to get old." Sadly Mr. Burns did not appear for his famed booking at London's Palladium to celebrate 100. A bad fall led to its cancellation and he celebrated this marker elsewhere. In "Curtain Falls: George Burns Dies at 100" (Seattle Times, March 10, 1996), reporter Howard Reich writes that Burns extolled the virtues of passion about what one does, adding that "If you can fall in love with what you're going to do for a living, you got it made." Hear, hear for the motivational cue.

From an economic perspective, global demographics open the door wide to tremendous business opportunities for financial service companies. Providing advice to seniors as well as employers that want gray matter is one promising area. Restructuring existing retirement plans is yet another. Consider the recent announcement that BT Retirement Saving Scheme has arranged for longevity insurance and reinsurance "to provide long term protection to the Scheme against costs associated with potential increases in life expectancy of members." The 16 billion GBP is "the largest ever in the UK and involved the creation of the BT Pension Scheme's own insurance company." See "BT Adds Longevity Insurance to Limit Risks of Pension Plan" by Amy Thomson and Sarah Jones (Bloomberg, July 4, 2014).

Enjoy the popcorn, watch the summer flick and then ponder what you intend to do with the rest of your life. If that means putting together your business plan for creating value-add services to companies and individuals in this new era, go for it. There are lots of ideas for profit.