ERISA Whistle Blowers

In the aftermath of the November 17, 2014 Strafford CLE webinar entitled ERISA Plan Investment Committee Governance, I asked several attorneys for their thoughts about whistle blower protection.

Attorney Stephen P. Wilkes, Of Counsel to The Wagner Law Group, took time out of a busy schedule to share his thoughts about a hypothetical scenario. He wrote the following:

Person X, a corporate officer, is a member of the Investment Committee for the corporate retirement plan ("Plan"). Person X determines that a specific course of action is in the best interest of the Plan (e.g. remove employer securities as an investment option or replace Bank Y with Bank Z as trustee). However, the Chief Financial Officer ("CFO") of this made-up company inappropriately steers the decision to one that serves the corporate interest and not the Plan interest (e.g. maintain employer securities as an investment option or continue to use Bank Y as trustee because it is providing corporate finance services to the company at below-market prices).What is Person X to do? He or she has a duty to serve the company and its shareholders, yet as an ERISA fiduciary, is there is a duty owed in this instance to the Plan and its participants? Person X complains to the U.S. Department of Labor ("DOL"). Five months later, Person X is terminated from employment by the CFO for "performance issues."

There is an inherent conflict of interest when corporate officers serve in an ERISA fiduciary capacity. The DOL and the U.S. Supreme Court have each determined that one can wear dual hats (sometimes an ERISA fiduciary, other times not an ERISA fiduciary),

In this hypothetical situation, Person X is clearly wearing the ERISA fiduciary hat when engaged in Plan Investment Committee work and owes the corresponding duty at that time to the Plan and its participants and beneficiaries.

The very purpose of the whistleblower statutes (such as ERISA Section 510 or Sarbanes-Oxley Section 1514A) is to root out problems and protect the reporting individual (the "whistleblower") from retaliation in this sort of scenario.The legal mechanism is in place to protect whistleblowers.There are some legal distinctions yet to be fully resolved about whether or not a particular retaliation is unlawful or not. They turn on whether an employee "has given information or has testified or is about to testify in any inquiry or proceeding." In other words, there are some open legal issues about whether unsolicited grievances are protected (as compared to whistle-blowing about ERISA violations during an active or ongoing investigation).

The question as to whether the presence of senior management who serve alongside mid-level or junior-level employees at the ERISA fiduciary table creates a "chilling" effect is a good one. Though the answer ultimately turns on the compliance culture of each company, potential problems can be mitigated well in advance with solid corporate governance and ERISA fiduciary training, as well as having appropriate policies and procedures in place with regard to risk management.

On behalf of the readers of Pension Risk Matters, thank you Attorney Wilkes.Your insights are much appreciated.

ERISA Plan Investment Committee Governance

In case you missed "ERISA Plan Investment Committee Governance: Avoiding Breach of Fiduciary Duty Claims" with Dr. Susan Mangiero (Fiduciary Leadership, LLC), Ms. Rhonda Prussack (Berkshire Hathaway Specialty Insurance) and Attorney Richard Siegel (Alston & Bird), click to download the November 17, 2014 presentation or visit the Strafford CLE website to obtain the audio recording.

Given the importance of the investment committee governance topic and emerging market trends in the area of outsourcing, my comments focused on committee structure, guiding documents, training and implications when third parties sign on as fiduciaries. Points I made during the webinar include, but are not limited to, the following:

  • The ERISA Advisory Counsel, in its 2014 Issue Statement about outsourcing employee benefit plan services, cites a desire to understand how vendor contracts address provisions such as termination rights, indemnification, liability caps and service level agreements.
  • An evaluation of the outsourcing business model is not surprising given a service provider push to serve as an Outsourced Chief Investment Officer or Fiduciary Risk Manager. (An Asset International publication refers to the OCIO movement as a fast-growing segment of investment consulting.)
  • Once an investment committee has been authorized by the sponsor's board of directors, a core set of qualifications and experience needs can be assembled. Plan counsel can play a vital role in explaining fiduciary obligations.
  • Beyond that core base, facts and circumstances such as plan design, company size, industry structure and investment strategy should be taken into account as part of determining requisite training and experience.
  • Regular meetings are encouraged with frequency being determined in part by what has to be done by the investment committee and related time sensitivity of completing a task(s).
  • Notwithstanding the voluntary nature of having an Investment Policy Statement ("IPS") in place, an ERISA plan investment committee should establish one nevertheless that makes sense for a particular plan. Some organizations have been questioned after creating an IPS but not following it.
  • Creating (and following) an appropriate Risk Management Policy can likewise be useful, especially for ERISA plans that utilize derivative instruments and/or allocate money to more complex products or strategies.
  • Training is another mission-critical area. (According to "DOL Investigators Quiz Plan Sponsors On Training of Fiduciary, Attorneys Say" by Bloomberg BNA contributor Joe Lustig, fiduciaries are being asked by regulators whether training programs exist.)
  • Continuing education is beneficial since regulations, market conditions and plan-related objectives and strategies can change over time.

Someone from the audience asked whether it made sense for an investment committee to consist of a senior corporate executive such as a Chief Financial Officer and her direct reports. The point is that each fiduciary is equal at the investment committee "table" but otherwise unequal. This can present a big problem if any or all of the investment committee members disagree with the Chief Financial Officer. Worse yet, a subordinate (in corporate organization terms) may be reluctant to whistle blow about an imprudent decision made by the CFO while wearing her hat as ERISA fiduciary. I will leave the question as to legal protection to attorneys. However, in doing some research, it turns out that U.S. federal pension law does address whistle blower protections. Interested persons can click to read "ERISA Has a Whistleblower Provision? Yep." by Seyfarth Shaw attorneys Ada Dolph and Robert Szyba (June 19, 2014).

There is a lot more to say on the topic of investment committee governance, notably because ERISA lawsuits that are adverse to a plan sponsor tend to include all investment committee members as defendants. An effective infrastructure and good governance policies and procedures can help to mitigate fiduciary personal and professional liability and position the investment committee to better serve participants.

Susan Mangiero of Fiduciary Leadership, LLC Earns the "Professional Plan Consultant" (PPC) Credential

Trumbull, CT (November 6, 2014) – Dr. Susan Mangiero is pleased to announce her designation by Financial Service Standards, a division of fi360, Inc. (Pittsburgh, PA) in the area of retirement plan consulting.  She is the recipient of this specialized designation known as the Professional Plan Consultant or PPC.

Recent regulatory changes to the qualified retirement plan industry have sparked an urgency to ensure that retirement plan service professionals have specialized training and resources to help sponsors meet their fiduciary obligations and a means of documenting that prudent practices are being followed in the management of an employer-sponsored plan.  Those professionals that help retirement plan fiduciaries and their counsel are seeking accreditation and certification to demonstrate a high level of knowledge and the ability to provide sponsors with the tools necessary to manage their plan effectively.

The Professional Plan Consultant™ designation was developed by Financial Service Standards with a goal of helping professionals that work with employer-sponsored retirement plans specialize in this increasingly regulated niche of the financial industry.  Program graduates must sit for either a two-day training class or complete the equivalent web-based training program, pass a comprehensive final exam, sign off on the FSS Code of Ethics, and commit to ongoing training in retirement plan management. 

Susan Mangiero is a Managing Director with Fiduciary Leadership, LLC. She is a CFA charterholder, certified Financial Risk Manager and Accredited Investment Fiduciary AnalystTM. Dr. Mangiero has been working within the investment management industry for over twenty years. She provides a variety of investment risk governance and valuation services to attorneys, regulators, asset managers, investment committees and other types of fiduciaries. Services include board training, business intelligence surveys, calculation of damages for dispute resolution purposes, expert witness testimony, investment best practices research, white papers, financial model reviews and procedural prudence assessments. She is the author of Risk Management for Pensions, Endowments and Foundations and the lead contributor to the award-winning blog, www.pensionriskmatters.com.

According to Dr. Mangiero, she is proud and excited to have received this distinguished designation. "It requires industry experience and reflects my dedication to raising the service standards in the retirement plan industry, whether for 401(k) plans, defined benefit ("pension") plans, Employee Stock Ownership Plans ("ESOP"s) or other types of employee benefit arrangements. This designation is an indicator that a professional has added to her knowledge and can access unique tools and resources that can help plan sponsors meet certain industry requirements."

Sharon Pivirotto, Founder & Managing Director of Financial Service Standards of Pittsburgh congratulates Dr. Mangiero on this achievement and "applauds her initiative to help customers plan, build and maintain a successful and compliant company-sponsored retirement plan. This kind of commitment and service approach ultimately means better retirements for many employees."

The 40lk Service Training Program, sponsored by Financial Service Standards, has been accepted for 12.5 continuing education credits by the Certified Financial Planner Board of Standards Inc. The PPC designation is listed on the FINRA website.

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.

Love What You Do and Do What You Love

We are movie aficionados in our family and try to see a variety of celluloid offerings, as time permits. We recently had the pleasure of seeing an uplifting motion picture entitled St. Vincent. Bill Murray plays a grumpy man who, at first glance, seems unlikely to warm any hearts. Over time, however, the audience learns that he is a good guy, a war hero and a kind person. He befriends the little boy who moves in next door and, no surprise, inspires smiles all around. At the end of the film, as the credits roll, there is a scene where Bill Murray is enjoying a quiet moment in his modest backyard, singing along to Bob Dylan's "Shelter From The Storm." Maybe because the song is lyrical or people were curious about the scene, they stayed and listened.

Although Bob Dylan was a musician from an earlier generation, he remains an admired talent and is recognized for his vast body of work. According to an October 2014 Rolling Stone article, Dylan is so prolific that The Lyrics: Since 1962 includes nearly one thousand pages and weighs "approximately 13 and a half pounds." In his early 70's, he is still giving live concerts.

There is something magical about being excited about music, friends, work and play. Famed author Ray Bradbury who died a few years ago at age 91 was quoted as saying "Love what you do and do what you love."

I certainly enjoy the challenges of providing forensic economic analyses and investment risk governance consulting. Colleagues and attorneys I know (some of whom are clients) often say that they are proud to be making a difference. That purpose and excitement about time well spent applies to others I know who are far removed from law or business. One friend (now sadly deceased) used to find great pleasure in selling office supplies and being able to interact with her customers.

Though it did not generate box office mojo, "Hector and the Search for Happiness" made the point that the pursuit of happiness may be trumped by the happiness of pursuit. Inspired by a book with the same title and authored by Francois Lelord, a French psychiatrist, the film referenced the mind-brain link of living a life with joy. It turns out that anyone with access to a computer can now take "The Science of Happiness," courtesy of the University of California - Berkeley and professors from the Greater Good Science Center.

Whether you are heading towards retirement or solidly part of the workforce, keep Bobby McFerrin's words in mind. "Don't worry, be happy." It's a good way to live life.

Retail Investors and Derivatives Trading

During a catch-up conversation, a now-retired colleague told me how much money he was making by trading options. Based on several recent articles, it seems that he is not alone in looking to Wall Street instruments in hopes of an income boost or a way to hedge uncertainty. In "Retail Investors Flock to Derivatives for Income and Safety" (TheStreet.com, October 31, 2014), senior reporter Dan Freed describes a growing trend in trading options and futures, with growth rates that exceed the level of purchases and sales of stock. On November 3, 2014, the Options Clearing Corporation reported a 22.32 percent rise in total equity and index option volume in October 2014 from one year earlier, "the second highest monthly volume on record behind the August 2011 record volume of 554,842,463 contracts" or a year-to-date volume of 3,673,768,194 contracts.

Reuters journalist Chris Taylor describes the average options trader as 53 years of age, citing Options Industry Council statistics that put nearly thirty percent of those who trade options at between "the ages of 55 and 64." However, in "New baby boomer hobby: trading options" (July 9, 2013), even retirees with a high net worth are cautioned to educate themselves about the downside of leverage. Mary Savoie, Executive Director of the Options Education Program, talks about the free resources made available by the Options Industry Council.

Critics counter that formal training cannot replace experience and that retirement assets should be invested with a long-term goal in mind, especially for those individuals with a low net worth. What they may not realize is that numerous retirement plans are chockablock with exposure to derivatives in the form of investment funds that trade swaps, options and futures. In mid-September of this year, Bloomberg reporters Miles Weiss and Susanne Walker wrote that then PIMCO senior executive and co-founder of the Pacific Investment Management Company Bill Gross "sold most of the $48 billion of U.S. Treasuries held by his $221.6 billion Pimco Total Return Fund (PTTRX) in the second quarter, replacing them with about $45 billion of futures. In "SEC Preps Mutual Fund Rules," Wall Street Journal reporter Andrew Ackerman (September 7, 2014) cites a concern on the part of the U.S. Securities and Exchange Commission about the use of derivatives by certain mutual funds and could seek "to limit the use of derivatives in mutual funds sold to small investors, including both alternative funds and certain 'leveraged' exchange-traded funds, volatile investments that use derivatives to double or even triple the daily performances of the indexes they track..." 

Over the years, I have traded derivatives, valued derivatives, reviewed financial models, created hedges and stress tested deals for compliance purposes. Throughout that time, the global markets continue to grow, attesting to their popularity. Earlier this summer, the Bank for International Settlements measured the over-the-counter derivatives market as having expanded to outstanding contracts with a value of $710 trillion at yearend 2013, up from $633 trillion in a single year.

Whether singular derivative transactions are appropriate for any one individual plan participant depends on a number of factors. Suffice it to say, derivative instruments are here to stay. It would be incorrect to underestimate the ubiquitous nature of derivatives. Besides asset managers who use derivatives, there are plenty of structured products that layer in derivatives with traditional equity or fixed income securities.

Stay tuned for more from the regulators about the usage of derivatives and asset management. In the aftermath of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, rules about derivatives trading and clearing are changing the operational and technology landscape. Fund directors not already in the know are being urged to pay attention to the economic impact on fund activity when derivatives are used. Click here to download a good risk management checklist. It is part of a November 8, 2007 speech by Gene Gohlke, then Associate Director, Office of Compliance Inspection and Examinations, SEC. Entitled "If I Were a Director of a Fund Investing in Derivatives - Key Areas of Risk on Which I Would Focus," Attorney Gohlke addresses the panoply of due diligence considerations such as custody, pricing and valuation, legal, contractual, settlement, tax, performance calculations, disclosure, investor reporting and compliance. These are important knowledge areas for investors too.

Pension Risk Matters Cited As Newsletter That 401k Advisors Should Read

As I have stated many times, this blog was created more than seven years as a labor of love (excuse the pun). Objectives include the following: (a) encouraging conversations about the importance of investment risk governance for U.S. and non-U.S. retirement plans (b) sharing educational surveys and research papers and (c) describing and interpreting important trends in the industry. Our readership continues to grow and it is my pleasure to dedicate time to the care and feeding of PensionRiskMatters.com as the primary contributor.

Accolades about the website are appreciated, especially from individuals who themselves dedicate considerable time to the topics of fiduciary education and best practices. I am proud to learn that Ms. Sharon Pivirotto lists PensionRiskMatters.com as one of "12 Newsletters All 401k Advisors Should Read" (Linkedin.com, October 24, 2014), referring to our site as "a very robust blog with articles covering regulatory, risk, and practice management topics for pension professionals."

Thank you for the recognition Sharon. As co-founder of Financial Service Standards (now part of the fi360 family), your opinion counts.

Thanks too for the individuals who have generously provided time and energy since this pension blog launched in 2006. Readers tell us that they value the chance to read interviews with industry thought leaders and have access to various studies and insights about critical retirement industry topics.

To our readers, please accept our gratitude for your interest and helpful comments.

Pension De-Risking Gets Political

I have long maintained that retirement plan issues receive considerable attention whenever politicians enter the fray. Certainly that is the case with the U.S. debate about fiduciary standard rules among lawmakers, industry and regulators. Now it seems that de-risking is the next topic du jour for Congress.

According to "2 senators call for derisking rules" by Hazel Bradford (Pensions & Investments, October 23, 2014), U.S. Senate Finance Committee Chairman Ron Wyden (a Democrat from Oregon) and the Chairman of the Health, Education, Labor and Pensions Committee, Tom Harkin (a Democrat from Iowa) have asked government officials at various agencies to "consider developing guidance on procedures and the fiduciary duties of plan sponsors." The article describes their letter to the U.S. Department of Labor, the U.S. Department of Treasury, the Pension Benefit Guaranty Corporation ("PBGC") and the Consumer Financial Protection Bureau as emphasizing the involvement of insurance companies for lump-sum and risk transfer transactions.

Nick Thornton wrote in "Lawmakers urge clearer rules for de-risking" (Benefits Pro, October 23, 2014) that said letter cited concerns such as the following:

  • Loss of PBGC protection in the event of a plan takeover;
  • Risk of persons "self-directing their retirement savings over the course of their retirement";
  • Possible reduced rights for spouses when a lump sum settlement is involved; and/or
  • Loss of ERISA's protection.

There is nothing wrong with clarifying legal and economic rights but one worries that past may be prologue when it comes to imposing mandates. Too many times, overly simplistic regulation induces a perverse outcome. (Read "Unintended Consequences" by Rob Norton (Library of Economics and Liberty) for a discussion of this concept.) Given the often complex array of facts and circumstances for every ERISA plan and its sponsor, a "one size fits all" is ill-advised.

A silver lining is that national conversations can (hopefully) generate changes that encourage further saving for retirement. In "Combating a Flood of Early 401(k) Withdrawals" (New York Times, October 24, 2014), Ron Lieber paints a bleak picture. He points out that a recent announcement by the Internal Revenue Service that allows more money to be set aside as an official contribution will be of little consequence to non-savers. He describes a large number of workers who "pulled out $60 billion" of the $294 billion in employee contributions and employer matches that went into the accounts." Statistics show that about forty percent of persons in flux "took out part or all of the money in their workplace retirement plans when leaving a job in 2013."

Speaking of planning ahead, visit the Art of Saving website to learn more about an effort to make November 5 a U.S. National Savings Day. The Consumer Federation of America is promoting thrift as part of its America Saves National Savings Forum on May 20, 2015 in Washington, DC.

Get out the balloons for satisfied piggybanks.

ERISA Plan Investment Committee Governance

Following up on the theme I discussed about investment committee dynamics in "Decision Making When You Don't Like Your Colleagues" (September 9, 2014), Strafford Publications is sponsoring a related webinar. Entitled "ERISA Plan Investment Committee Governance," this November 17 2014 continuing legal education event will address oversight and management issues from multiple perspectives. If you are interested in attending as my guest, the first ten people who email contact@fiduciaryleadership.com will be registered on a no-fee basis. If you have questions for the panelists, letting us know in advance will be helpful.

Speakers are Dr. Susan Mangiero (Managing Director - Fiduciary Leadership, LLC), Ms. Rhonda Prussack (Vice President and Fiduciary Liability Product Manager - Berkshire Hathaway Specialty Insurance) and Attorney Richard Siegel (Alston & Bird LLP).

The panel will answer questions such as the following:

  • How important is investment committee governance?
  • How best must plan sponsors vet fiduciary risks when selecting an investment committee?
  • What is the role of ERISA fiduciary liability insurance?
  • What litigation techniques can be implemented to minimize the likelihood of a finding of breach of fiduciary duty by an investment committee?

Join us if you can. Click here to learn more.

UK Survey Highlights Fiduciary Management Trend

According to a September 8, 2014 press release, a survey of 359 UK pension professionals by Aon Hewitt suggests that investment complexity and a busy schedule are driving the increase in demand for outside help. Notably, researchers found that strategies such as liability-driven investing require a lot of analysis and that "trustees are spending less time dealing with these decisions, with 73% of trustees devoting no more than five hours each quarter to investment issues, up from 67% in 2013." Other highlights include an observation that larger plans may opt for some help whereas smaller plans, i.e. those with assets of 500 million GBP or less "are the most likely to opt for full fiduciary management." See "Aon Hewitt Fiduciary Management Survey 2014 finds the majority of schemes opting for tailored measurement of provider performance."

The issue of time and a long list of tasks that must be carried out is not unique to the UK. In "Beyond the Beauty Contest" (June 2014), Russell Investments describes its Outsourced Chief Investment Officer ("OCIO") solution for a Canadian defined benefit plan committee that was "spending most of their time hiring and firing managers."

Acknowledging that firms with third party service offerings have a vested interest in being hired by overloaded pension executives (many of whom have full-time jobs on top of committee work), the issue as to how persons with fiduciary responsibilities spend their time is an important one to discuss.

In "The Investment Committee: Pitfalls to Avoid," the Association of Governing Boards recommends that there not be "too many" members and to adhere to an agenda. Group think is discouraged as it "can result in bad decisions that reflect the prevailing consensus of what has worked recently..." Organizations with strong support staff enjoy the advantage of having a lot of time-consuming analyses done ahead of oversight and strategy meetings. Creating and then following documents such as a clear Investment Policy Statement and Committee Charter likewise has value.

There never seems to be enough time for any investment professional. When billions of dollars are at stake, effective scheduling and use of available resources is critical.

Asset Manager Talent and Pension Client Departures

As a trained appraiser, I have long considered the importance of key person risk when assessing the viability of an organization. A related critical issue is whether a succession plan exists and can be implemented with ease. This in turn depends on the existence and quality of talented professionals who understand how to grow a business, navigate complex regulations and focus on customer satisfaction. When a firm has too few successors who can assume a leadership role as needed, there is a risk of poor future performance and a worst-case scenario of not being able to maintain itself as an ongoing concern. On the other hand, installing new executives with a fresh perspective could lower business risks, especially if institutional investor clients have made it clear that they are unhappy with the status quo. A review of investment strategy alone seldom tells the complete story about an asset manager or advisory firm's acumen. An assessment of how the business is run and who is in charge is likewise important.

Consider the recent news about Pacific Investment Management Company, LLC ("PIMCO"). Established in 1971, this Allianz entity has grown into what many would describe as a bond market behemoth. According to a current press release, PIMCO had $1.876 trillion in assets under management as of September 30, 2014. A few weeks earlier, on September 26, 2014, it was announced that co-founder and Chief Investment Officer ("CIO") William H. Gross had resigned, adding that "The firm has a succession plan in place."

Since that announcement, some institutions have decided to terminate PIMCO or put the firm (or some of its funds) on watch, pending further analysis. According to "Arkansas Exits Post-Gross PIMCO as Pensions Review Money Manager" by Brian Chappatta (Bloomberg, October 13, 2014), the exit of Mr. Gross "caused $23.5 billion in redemptions in September from the $201.6 billion Total Return Fund." Skittish clients include the Arkansas Teacher Retirement System ($472 million), California's 529 college-savings program ScholarShare ($262 million) and Florida's State Board of Administration (withdrawing "more than $1 billion that the company manages for the 401(k)-style program that the state offers workers"). It is said that the Texas Municipal Retirement System and Indiana, North Dakota, Michigan and Illinois retirement plan decision-makers are mulling over how best to react to this staff change.

Although cited reasons vary as to redemption requests, at least some appear to be related to uncertainty about trading personalities. Reuters journalists Simon Jessop and Nishant Kumar warn that "With much of a mutual or hedge fund firm's value tied up in the brain power of its employees, as opposed to bricks, mortar and other hard assets, the loss of an important employee - known in the trade as 'key man risk' - exposes the firm to asset flight which can even force it to sell holdings at a loss." See "As PIMCO bleeds assets, Gross shows risk of star culture" (October 2, 2014).

Some companies have gone the route of having marquee employees sign non-compete contracts as a way to mitigate key person risk although they are not fail-safe protective mechanisms. Enforcement of a particular non-compete agreement can by legal venue. Signers sometimes get cold feet. "[S]tar trader Chris Rokos" is seeking to overturn what he deems overly harsh restrictions on his ability to start a new enterprise. See "Brevan's Ex-Star Trader Contesting Non-Compete Restriction" by Laurence Fletcher (Wall Street Journal, August 26, 2014).

Governance is an issue. For an institutional investor that relies on a disciplined selection and review process, a premature exit from a particular fund or fund company could be costly. In "Too Early to Hit the PIMCO Panic Button," Plan Sponsor journalist Jill Cornfield (October 9, 2014) describes the advantages of communicating the duties of an investment committee to plan participants. Such a letter or memo could include an explanation about how committee members pick and review asset management firms. This way, an exit from a fund when a key person leaves will not necessarily come as a big surprise.

The exertion of influence of third parties should not be ignored. In its Morningstar Stewardship Grade report about PIMCO dated September 29, 2014, Eric Jacobson and Bridget B. Hughes wrote that "Continued disruption among PIMCO's independent trustees raises significant concern about the board's independence as well as its long-established setup."

There is no doubt that more news will follow with respect to PIMCO and other investment management organizations that promote the use of individuals with the power to attract headlines.