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.

ERISA Advisory Council Investigating Fiduciary Management

According to a 2014 statement, the ERISA Advisory Council intends to investigate the nature of retirement plan outsourcing and report its research to the U.S. Department of Labor ("DOL"). "Outsourcing Employee Benefit Plan Services" cites objectives to include the following:

  • Discussion about current practices in outsourcing and whether variables such as plan size or type impact the services provided to ERISA plans;
  • Clarification of "the legal framework under ERISA for retaining outsourced service providers..." and possible areas for regulatory guidance;
  • Getting suggestions about the management of potential conflicts of interest;
  • Further discussing the "scope of co-fiduciary liability in the outsourcing context" for 3(16), 3(21) and 3(38) relationships;
  • Discussion about how contracts are put together between an ERISA plan and a service provider to address issues such as termination rights, indemnification, liability caps; and
  • Examination of insurance coverage and ERISA bonds when an outsourcing arrangement exists.

This news is not particularly surprising. The topic of fiduciary management continues to attract attention, in part because it appears to be growing as a business model in the United States, United Kingdom and elsewhere. According to a survey of 73 pension plans and their advisors, Buck Consultants found that 70% "had at least considered going down that route." For those schemes that that had engaged a fiduciary manager, they cited motivations such as "improved speed in the decision making process, greater focus on the end game, and improved expertise." At the same time, UK-based Brian McCauley, Head of Fiduciary Evaluation at Buck Consultants, added that the governance burden is still "huge." In "Perceptions of Fiduciary Management," Stephenson Harwood attorney Fraser Sparks addresses concern about conceivable conflict of interest trouble spots when "an advisor turns into a provider." One offered solution is to engage an independent third party to evaluate the qualitative and quantitative characteristics of fiduciary manager short list candidates.

Stateside, ERISA legal experts debate the pros and cons of the outsourced fiduciary approach. In "New flavor of outsourced fiduciary for retirement plans hits the market" Investment News reporter Darla Mercado writes that "This latest service offering is popping up in an era when plan sponsors have a heightened awareness of their fiduciary responsibilities and are looking to offload some of them so that they can get back to the day-to-day work of running their business." Drinker Biddle & Reath attorney, C. Frederick Reish, talks about "3(16) lite" and the need to "[r]ead the fine print." The April 2, 2014 piece emphasizes that "...plan sponsors still have the responsibility of choosing and monitoring their service providers."

In "Expert Q&A on Outsourcing Fiduciary Investment Responsibilities" (Practical Law, February 2014), Groom Law attorneys David N. Levine and Allison Tumilty explain the legal dimensions of outsourcing fiduciary investment responsibilities and the advantages and disadvantages of passing the baton for certain delegated tasks. They add that outsourcing "can be appropriate for defined benefit and defined contribution plans of all sizes."

From my perch as a forensic economist who is sometimes hired to give expert testimony, I have observed a larger number of cases being filed that address the relationship between plan sponsor and service provider. Whether that trend continues remains to be seen. Given the foregoing, the ERISA Advisory Council inquiry is likely to be both timely and informative.

ACI ERISA Litigation Conference - New York City

I have the pleasure of announcing that Fiduciary Leadership, LLC is one of the sponsors of this recurring educational conference. For a limited time only, I am told that interested parties can register early and receive a discount. Contact Mr. Joseph Gallagher at 212-352-3220, extension 5511, for details.

Besides two full days of interesting and timely presentations, the American Conference Institute conference about ERISA litigation gives attendees a chance to hear different perspectives. Scheduled speakers include investment experts, corporate counsel, defense litigators, plaintiffs' counsel, class action specialists, judges and fiduciary liability insurance executives, respectively.

Click to download the ACI ERISA Litigation Conference agenda or take a peek at the list of topics as shown below:

  • Fifth Third v. Dudenhoeffer and the Impact of the Decision on the Future of Stock Drop Case and Litigation Regarding Plan Investments;
  • ERISA Class Actions Post-Dukes and Comcast: Standing, Commonality, Releases and Arbitration Agreements, Monetary Classes, Issue Certification, Certification of “Class Of Plans”, Class Action Experts and Halliburton, and More;
  • The Affordable Care Act, Health Care Reform and New Claims and Defenses in Workforce Realignment Litigation;
  • 401(k) Fee Cases: Current Litigation Landscape and Recent Decisions, Evolving Defense Strategies, DOL Enforcement Initiatives, Impact of Tussey and Tibble, Excessive Fund Fees, and More;
  • Retiree Health and Welfare Benefits: M&G Polymers USA, LLC v. Tackett and the Yard-Man Presumption;
  • Multiemployer Pension Plan Withdrawal Liability;
  • Independent Fiduciaries: Working with Them to Manage Plan Assets, Handle Administrative Functions and Authorize Transactions; and the Latest Claims Involving Failure to Monitor Independent Fiduciaries and/or Keep Them Informed;
  • ESOP: New and Emerging Trends in Private Company ESOP Litigation, Lessons Learned from Recent Decisions in ESOP Cases, and the Latest on DOL Investigations and Enforcement Priorities;
  • Benefit Claims Litigation: the Latest on ERISA-Specific Case Tracks Aimed at Discovery Disputes, Attorney Fees Post-Hardt, Limitation Periods in Plans, Addressing Requests for Evidence Outside of the Record in “Conflict” Situations, Judicial Review of Claims Decisions and the Battle Over Discretion, and More;
  • Fiduciary Liability Insurance: Assessing Current Coverage and Future Needs & Strategic Litigation and Settlement Considerations;
  • New Trends in Church Plan Litigation;
  • New Trends in Top Hat Plans: The Latest Litigation Risks;
  • Public Pension Developments and Trends; and
  • Ethical Issues That Arise in ERISA Litigation: The Fiduciary Exception to Attorney-Client Privilege, the Question of Who Really Is Your Client.

In April of this year, I presented at the ACI ERISA Litigation conference in Chicago about working effectively with an economic and/or fiduciary expert. Click to access the slides entitled "Expert Coordination: Working With Financial and Fiduciary Experts" by Attorney Joseph M. Callow, Jr. (Keating Muething & Klekamp PLL), Attorney Ronald S. Kravitz (Shepherd, Finkelman, Miller & Shah, LLP) and Dr. Susan Mangiero (Fiduciary Leadership, LLC). For a recap of this session, click to read "ERISA Litigation and Use of Economic and Fiduciary Experts" (May 5, 2014).

On October 28, 2014, I will be part of a panel about public pension fund issues. I will be joined by Attorney Elaine C. Greenberg (Orrick, Herrington & Sutcliffe LLP) and Attorney H. Douglas Hinson (Alston & Bird LLP). Topics we plan to cover are shown below:

  • Overview of Public Pension Market - Scope, Size and Funding Levels;
  • Government Plan Hot Button Issues;
  • Pension Reform:
  • Pension Obligations and Bankruptcy, With Discussion of Detroit;
  • SEC Enforcement Actions, With Discussion About the State of Illinois;
  • New Accounting and Financial Reporting Standards;
  • Use of Derivatives by Municipal Pension Plans;
  • Fiduciary Breaches as They Relate to Due Diligence; and
  • Suggestions for Risk Mitigation and Best Practices.

I hope to see you in the Big Apple in a few months!

New GAO Study Addresses Performance Audit Reports

Courtesy of the U.S. Government Accountability Office, a new study looks at performance audits for different types of pension plans. The report is entitled "Oversight of the National Railroad Retirement Investment Trust" (May 2014) and responds to requests from members of the U.S. Congress for information about this $25 billion retirement plan. Based on countless interviews with regulators, private fiduciary experts (and yes, I did answer some questions about benchmarking) and pension fund executives, the authors put forth the idea that performance audits could be mandated to occur more often. Interestingly, GAO researchers point out that "the frequency with which the Trust has commissioned performance audits is comparable to or exceeds most state efforts," adding that "...nine state plans are audited at least once every 2 or 3 years" with interviewees from 19 states pointing out that retirement plans "were subject to audits at longer set intervals that varied from state to state or were not reviewed according to any established time frame."

Pension fund accounting and performance benchmarking is certainly getting its share of attention. U.S. Securities and Exchange Commissioner Daniel Gallagher recently decried what he believes is an under-reporting of "trillions of dollars in liabilities. In his May 29, 2014 speech before attendees of the Municipal Securities Rulemaking Board's 1st Annual Municipal Securities Regulator Summit, Commissioner Gallagher talks about pension and OPEB liabilities as a serious threat and warned that "...it is imperative that bondholders know with precision the size of the potential pension liabilities of the entities in which they are investing. And yet, they do not." He adds that the "threat has been hidden from investors." As Lisa Lambert and Lisa Shumaker describe, government officials say that these sharp remarks sting and will scare people into thinking that a systemic problem exists. Read "Pension groups strike back at SEC commissioner's criticism" (Reuters, June 16, 2014). In its Q1-2014 update, the National Association of State Retirement Administrators ("NASRA") show that public pension fund assets have grown to $3.66 trillion, up slightly from the year-end 2013 level of $3.65 trillion.

On the rule-making front, the Governmental Accounting Standards Board ("GASB") just published an update to its pension accounting standards and posted a pair of brand new proposals to "improve financial reporting by state and local governments of other post-employment benefits, such as retiree health insurance." See "GASB Publishes Proposed Accounting Standards for Government Post-Employment Benefits" by the editor of AccountingToday.com, Michael Cohn. You can download the three documents by visiting the GASB website. Click to access GASB's microsite about Other Postemployment Benefits ("OPEB").

The good news, as I have said all along, is that initiatives for heightened transparency are underway. For more difficult situations, don't be surprised if litigation about disclosures continues to occur. In case you missed the February 24, 2014 Practising Law Institute ("PLI") CLE webinar, you can purchase the slides and audio recording of "Muni Bonds, Pensions and Financial Disclosures: Compliance, Litigation and Regulatory Trends." I co-presented with Orrick, Herrington & Sutcliffe LLP partner, Elaine Greenberg. My focus was on risk management, valuation, performance and investment decision-making.

Making Bets on U.S. Supreme Court Decisions

If I ever earn a spot on a game show like Jeopardy, answering questions about sports will be a challenge. I recognize that, unlike me, there are serious fans who spend more than a few hours each week, vetting all sorts of statistics and data points about what team is likely to win and by how much. At family gatherings, I hear nephews and in-laws waxing poetic about games such as Fantasy Football. According to the Fantasy Sports Trade Association ("FSTA"), only skilled parties need apply, adding that there is no gambling.

Big money is at stake. According to "Industry Demographics: At A Glance," nearly 34 million individuals, mostly men, played fantasy sports in the United States in 2013. Canada counts roughly 3.1 million fantasy sports players. Over a twelve month period, aggregate league fees for fantasy games tallied $1.71 billion. For information materials, the spend was $656 million. It was $492 million for challenge games. (For us neophytes, what is a challenge game?) Decade-long performance reflects "explosive absolute growth" of 241 percent or an annualized growth rate of 13.1 percent for 2008 through 2018. See "Top 10 Fastest Growing Industries" (April 2013).

So here I am, sitting at my computer, researching certain ERISA litigation matters, and lo and behold, what do I find? You guessed it - FantasySCOTUS. According to its dedicated website, over 20,000 lawyers, law students and "other avid Supreme Court followers" have opined as to how they believe cases will be decided. Click to view a short video about this Harlan Institute initiative.

For those who are waiting with bated breath for commentary about stock drop cases, fear not. Of 53 predictions, as of today, 23 votes are for affirmation by the U.S. Supreme Court and 30 votes are for reversal. There is even a breakdown of votes as to how each justice is expected to respond to the April 2, 2014 hearing about prudence. Click to check out the Fifth Third Bancorp v. Dudenhoeffer roster of votes. Click here to download a transcript of the hearing.

What will they think of next?

Pay to Play and Pension Funds

Having just co-authored an article about the Foreign Corrupt Practices Act ("FCPA") and its application to pension plans, the topic of economic inducements and fiduciary duties is fresh on my mind. As part of my research, I investigated what "pay to play" rules currently exist and what initiatives are underway to avoid inappropriate monies being paid by vendors to persons who control or have influence over the public purse. Certainly the topic is attracting attention. On October 8, 2013, the Superintendent of the New York State Department of Financial Services ("DFS"), Benjamin M. Lawsky, wrote to the Honorable Thomas P. DiNapoli, Comptroller of the State of New York, about the auditing of government pension plans and their service providers. "Controls to prevent conflicts of interest, as well as the use of consultants, advisory councils, and other similar structures" was listed as one of several areas of emphasis.

Jump ahead to this week's headlines and, not surprisingly, "pay to play" appears once again. With his June 9, 2014 press release, New York City Comptroller, Mr. Scott Stringer, announced the approval by all five New York City pension plans (with roughly $150 billion in assets) to ban the use of placement agents. This extends the prohibition of placement agents for all asset classes and not just the restriction imposed earlier for private equity investments. Click to read "New York City Pension Funds Enact Placement Agent Ban" for a list of the current trustees for the New York City Employees' Retirement System, Teachers' Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund and the Board of Education Retirement System.

The "thumbs up" from New York City pension plan trustees follows Comptroller Stringer's six point plan that he announced on January 30, 2014. Besides putting the kibosh on the use of placement agents, his office intends to "...dramatically reform policies and procedures governing [Bureau of Asset Management] by appointing senior risk and compliance officers to strengthen, monitor and continually improved operations..." Investment disclosures about personal trading of in-house fiduciaries is part of the game plan for New York City pension plans.

On a separate note, disclosure mandates about personal trading for members of the U.S. Congress and their aides and federal employees making more than $119,554 appears to have taken a step backwards with respect to government sunshine. According to "Insider Trading in DC Just Got Easier" by John Carney (CNBC.com, April 16, 2013), a modification of the Stop Trading on Congressional Knowledge ("STOCK") Act was passed by lawmakers on April 12, 2012 and then signed into law on April 15, 2013. As a result, any disclosures about personal trades that are part of the public record "aren't readily available...and have to be requested from individual agencies using the names of the individuals about whom information is sought." When asked about the change in disclosure requirements for all but the President, the Vice President, Members of and candidates for Congress and certain appointed officers, White House Press Secretary Jay Carney referred to recommendations made by the National Association of Public Administration ("NAPA") as the basis for "indefinite suspension" due to "substantial national security, personal security, and law enforcement issues on this matter." You can decide for yourself. Click to download "The STOCK Act: An Independent Review of the Impact of Providing Personally Identifiable Financial Information Online - A Report by a Panel of the National Academy of Public Administration Submitted to the Congress and the President of the United States" (March 2013).

Church Pensions

During a brief visit to Rome, I stayed in a room that literally overlooked this majestic dome, statues and all. It is part of St. Peter's Basilica, was designed by Michelangelo, has an estimated diameter of 42 meters and a height of 136 meters. It is possible to climb to the top for a sweeping view of Rome although the lines of tourists are long.

Being a few hundred feet away from the global seat of the Catholic church and because I research and analyze investment issues, including pensions, I wanted to know if a pope receives a pension. As it turns out, there is such a thing as a papal pension, now that one pope has officially retired. According to Slate journalist, Abby Ohlheiser, ex-pope Benedict XVI will receive a monthly stipend of 2,500 euros or about $3,200, depending on the prevailing U.S. dollar - euro exchange rate. She writes that the amount is comparable to what a bishop would receive upon retirement and that the pope carries the title of the Bishop of Rome. In addition, he will receive meals, housekeeping and access to the "Vatican's generous health care plan." Rent will cost him nothing as he alternates between the Castel Gandolfo in the summer and newly renovated digs in the convent of the Mater Ecclesiae during the rest of the year. Should he be promoted to cardinal emeritus, his monthly stipend will rise to 5,000 euros or nearly $80,000 to spend as he sees fit. See "What Type of Retirement Package Does an Ex-Pope Get? A Big One." In a February 28, 2013 essay on this topic, NBC contributor A. Pawlowski points out that the ex-pope's allowance is just shy of the maximum amount a U.S. senior citizen might be able to get each month from Social Security, subject to past income levels and only if the intended recipient waits until at least age 70 to retire. In the case of ex-pope Benedict XVI, he asked to be relieved of his job duties at the age of 85, citing health concerns. See "How the Pope's Retirement Package Compares to Yours."

More broadly, across the pond from Europe, plaintiffs have been challenging the status of certain church plans, asserting that these plans should not enjoy exemptions from ERISA. In at least one case to date, a federal judge has allowed a putative class action to move forward on the basis that an alleged church plan is subject to ERISA and needs to remedy its $1.2 billion underfunding. See "Dignity Health not exempt from federal pension rules, court finds" by Kathy Robertson (Sacramento Business Journal, December 30, 2013). I will address this topic in a separate post as it is important and timely and deserves its own commentary.

Headline Risk For Investment Fiduciaries

Following up my May 12, 2014 post entitled "Golf Course RFPs and Other Mistakes That Retirement Plan Fiduciaries Make," the source of that wisdom has given readers even more food for thought about the topic of service provider selection. In "More on the Golf Course RFP," senior ERISA attorney Steve Rosenberg warns that appointments "to smaller and mid-size companies, where benefit plans, particularly 401(k)/mutual fund programs, may be chosen by a company owner simply based on the vendors that are already in the owner's social circle, such as, yes, those at his or her country club." He adds that "picking a plan's vendor in that manner will most certainly come back to the bite the company owner" and that, "in a fiduciary duty lawsuit over that plan," such a selection would be deemed a "smoking gun used to show poor processes and a corresponding breach of fiduciary duty."

Attorney Rosenberg raises some good points about company size. Smaller to mid-size firms often have ownership that is concentrated in the hands of its owners or top managers. Diversification considerations can differ from those made by bigger plan sponsors as a result. That said, I have worked as a forensic and fiduciary expert on matters that entail carrying out an analysis of the service provider selection process used by various large companies.

More than a few investment fiduciaries have told me that they worry about personal and professional reputation in addition to liability for actions taken (or not as the case may be). A central take away is that standing out for the wrong reasons can have disastrous consequences.

2nd Annual Tri-State Institutional Investors Forum

I have the pleasure of moderating a timely and topical panel on June 11 for US Markets Center for Institutional Investor Education. Entitled "Fiduciary Responsibility for Management & Trustees," this session will focus on the importance of the Board in creating good governance practices. Topics to be discussed include the role of audits as a way to monitor activities, creating proper standards that allow for stakeholder transparency and lines of authority and reporting. The role of staff, the investment consultant and investment manager will likewise be covered. Panel participants are shown below:

Moderator:

  • Dr. Susan Mangiero, Managing Director, Fiduciary Leadership

Panelists:

  • Charles Tschampion, Director of Special Projects, CFA Institute
  • Edward M. Cupoli, Board Member, New York State Deferred Compensation Plan
  • Patricia Demaras, Senior Counsel, Xerox Corporation.

Click to download the entire program for the 2nd Annual Tri-State Institutional Investors Forum. Click to register. I hope to see you there!