Public Pension Risk Management and Fiduciary Liability

A few weeks ago, Attorney Terren B. Magid and Dr. Susan Mangiero jointly presented on the topic of pension risk management and fiduciary liability with a particular emphasis on public plans. Attorney Magid's insights reflect a particularly unique perspective inasmuch as he served as executive director of the $17 billion Indiana Public Employees' Retirement Fund ("PERF"). Dr. Mangiero shares her views as an independent risk management and valuation consultant, author, trainer and expert witness.

Click to download the 25-page webinar transcript for public pension fiduciaries entitled "Are You Properly Mitigating Risk? Assess Your Fiduciary IQ" with Attorney Terren B. Magid (Bingham McHale LLP) and Dr. Susan Mangiero (Fiduciary Leadership, LLC). Comments about ERISA plans are provided when applicable.

Topics discussed include, but are not limited, to the following:

  • Public Pension Transparency Act
  • Discount Rate Choice
  • Dodd-Frank Wall Street Reform and Municipal Advisor Registration
  • Expanded Definition of ERISA Fiduciary
  • Fee Disclosure Under ERISA 408(b)(2)
  • Failure to Pay and Actuarially Required Contribution ("ARC")
  • Benefit Reductions
  • RFP Process
  • Fiduciary Audits
  • D&O Policy Review
  • Vendor Contract Examination
  • Qualitative and Quantitative "Investment Risk Alphabet Soup"
  • Interrelated Risk Factors
  • Key Person Risk
  • Hard to Value Investing
  • Model Risk
  • Stress Testing
  • Pension Litigation
  • Fiduciary Breach Vulnerability
  • Characteristics of a Good Model
  • Side Pockets and Investment Performance.

Comments are welcome.

Pension Funds and Performance Standards

David Spaulding, founder of the eponymous Spaulding Group, provokes readers with his suggestion that pension plans become "GIPS" compliant. Said differently, his thought is that users of information provided about retirement plan financial health would benefit if reported numbers reflect the Global Investment Performance Standards. Just an aside, www.gipsstandards.org states that "The GIPS standards are voluntary and are based on the fundamental principles of full disclosure and fair representation of investment performance results."

I have long maintained the need for more uniformity and clarity about how pension plan numbers are shared with the outside world. Absent fraud, there can be a huge discrepancy between what someone reads on the printed page and the true economic risks associated with any given scheme. Take a look at "The Plan That Didn't Bark: To solve the mystery of benefit plans, analysts must learn to think like detectives" by Susan Mangiero, CFA Magazine, March-April 2008.

I applaud Dave for reminding his blog readers that the standards exist "to provide an ethical framework for asset managers to provide their past performance to prospective clients." He adds that pension funds that expend time and money on a "GIPS" effort stand to "get their shop in order" by being forced to establish policies, procedures and controls. However, he adds that plan sponsors will still need to document how they are doing so I am a bit unclear as to the role of GIPS for pension plans and have asked Mr. Spaulding for further clarification about his ideas.In the meantime, click to read "Pension funds and GIPS" at Investment Performance Guy, April 20, 2011.

Celebrate National Retirement Planning Week

It may not be a federal holiday but National Retirement Planning Week starts on April 11, 2011 with festivities planned throughout the week. Highlighted events include:

  • Online discussion about individuals' retirement readiness, hosted by the Employee Benefit Research Institute
  • Media Forum with industry experts about "risk management in the insured retirement market," led by the Insured Retirement Institute
  • Release of a toolkit that financial advisers can use to help their clients improve retirement planning
  • Roundtable hosted by the Aspen Institute on the topic of retirement issues.

For more information, read "National Retirement Planning Week® 2011 Kicks Off April 11" (Insured Retirement Institute press release, dated April 4, 2011). This educational initiative is sponsored by The National Retirement Planning Coalition that is headed by the Insured Retirement Institute and includes the American Council of Life Insurers, Americans for Secure Retirement, The American College, Aspen Institute Initiative on Financial Security, Women's Institute for a Secure Retirement and many more organizations seeking to "raise public awareness of the need for comprehensive retirement planning." 

Note to Readers:

Gateway to More ERISA Litigation

According to a March 30, 2011 regulatory update from attorneys at Goodwin Procter, ERISA litigation may increase as the result of U.S. Department of Labor ("DOL") efforts. Click to access "Regulatory Update - DOL Initiatives Potentially Affecting ERISA Litigation."

For one thing, should the definition of fiduciary be expanded, more persons will have potential liability. The pushback from various segments of the financial services industry has been considerable, leading to an extension of the time allowed for official comments through April 12, 2011.

A second hurdle to overcome emphasizes disclosure and takes the form of a final rule that goes into effect for plan years that start on or after November 1, 2011. Specifically, plan participants who are allowed to self-direct their investments must now be given granular performance and fee information about "designated investment alternatives," including identification of asset managers and arrangements and restrictions on brokerage accounts and participants' flexibility (or lack thereof) to give orders.

A third new item on the growing ERISA compliance checklist, if adopted by the DOL, will force service providers to submit a written statement of what services it will offer to the retirement plan(s) and copious data about how it expects to be indirectly and directly compensated.

I concur with the authors that more rules likely beget more lawsuits. Part of the current ills that the DOL seeks to cure is to make sure that a sufficient quantity and quality of information is available to decision-makers.

Clearly, more and better datapoints can be helpful. Absent an inflow of information, what are decision-makers doing now to properly carry out their fiduciary duties? Understanding what is or is not being conveyed as billions of dollars are committed is of significant import in terms of good process.

Note to Readers:

  • Click to read the 469 page transcript of March 1, 2011 testimony on the topic of an expanded definition of ERISA fiduciary.
  • Click to read the 387 page transcript of March 2, 2011 testimony on the topic of an expanded definition of ERISA fiduciary.