Pension Risk Management for Retirement Plans

I'm delighted to work with the Professional Risk Managers' International Association ("PRMIA") in delivering four (4) educational webinars about retirement plan risk management. According to its website, PRMIA is a "non-profit professional association" with forty-five chapters in various countries around the world. Click to download the PRMIA brochure for more information about membership. I hope you will join us in February and March for what should be an exciting and timely quartet of live events. If you cannot attend in real time, the webinars will be archived for later use. See below for details.

           Lead Instructor: Dr. Susan Mangiero, AIFA®, CFA®, CFE, FRM®, PPC™

                               Thursdays from 10:00 - 11:15 am EST / 3:00-4:15 GMT
                                       February 23 | March 2 | March 9 | March 16

                                                     A Virtual Training Series

This series consists of four webinar lectures, each one delivered with the goal of providing actionable information that can be used by the audience right away.

With approximately $100 trillion in global assets under management, retirement plan fiduciaries and their attorneys and advisors face numerous challenges in the aftermath of the worldwide credit crisis that began in 2008. Market volatility, investment complexity and compliance with new accounting standards and government mandates, alongside a strident call for better accountability and transparency, are a few of the pain points that keep pension executives up at night. Litigation and regulatory investigations are on the rise. As a result, enlightened pension decision-makers are turning their attention to risk management technology and techniques as a way to mitigate economic, legal and operating trouble uncertainties. Those who ignore the adverse impact of longer life spans, statutory capital requirements, binding financial statement reporting rules and broader fiduciary duties are destined for trouble. In some countries, trustees may be personally responsible for poor plan governance and may have to pay participants from their own pockets.

Who Should Attend

This series should be of interest to a broad range of financial and legal professionals since poor governance and/or too few resources being devoted to pension risk management within a fiduciary framework can (a) force benefit cutbacks for participants (b) lead to a ratings downgrade which increases a sponsor’s cost of capital (c) force a plan sponsor to come up with millions of dollars (pounds, euros, etc.) in cash for contributions (d) result in a costly lawsuit and/or regulatory enforcement (e) thwart a merger, acquisition or spin-off and/or (f) cause a sponsor to be out of compliance with financial and statutory reporting requirements.

Both senior-level decision makers and staff members can benefit from viewing this series of webinar lectures. Representative titles of likely audience members include: • Directors of the board • CFOs, treasurers, controllers and VPs of finance • Members of a sponsor’s pension investment committee • Pension consultants • Pension advisors • Pension and securities attorneys • Pension and securities regulators • Rating analysts • Financial journalists • Derivatives traders • Executives with derivatives and securities exchanges • ERISA, municipal and sovereign bond and D&O liability insurance underwriters • International, U.S. federal and state lawmakers • Think tank researchers • Industry associations • Chambers of Commerce in various countries • Economists who cover demographic patterns and • Risk management students.

Session One (February 23, 2017): Establishing Risk Management Protocols for Defined Benefit Plans and Defined Contribution Plans

Session One examines risk management for retirement plans from both a governance and economics perspective. Topics to be discussed include the following:

  • Procedural prudence and the costs of ignoring fiduciary risk;
  • Risk management differences by type of retirement plan;
  • Industry norms and pitfalls to avoid;
  • Role of Chief Risk Officer, investment committee members and in-house staff; and
  • Suggested elements of an Investment Policy Statement.

Session  Two (March 2, 2017): Use of Derivatives in Pension Plans

​Session Two looks at how derivatives are used by retirement plans, whether directly or indirectly. Topics to be discussed include the following:

  • Current usage of derivatives by retirement plans for hedging purposes;
  • Financially engineered investment products and governance implications:
  • Fiduciary duties relating to monitoring risks and values of derivatives; and
  • Suggested elements of a Risk Management Policy Statement.

Session Three (March 9, 2017): Liability-Driven Investing and Other Types of Pension Risk Transfer Strategies

Session Three examines the reasons why the number of pension restructuring deals is on the rise, especially in the United States and the United Kingdom, and the type of transactions being done. Topics to be discussed include the following:

  • Nature of the pension risk transfer market and various approaches being utilized;
  • Regulatory considerations for fiduciaries in selecting an annuity provider;
  • Action steps associated with implementing a pension risk transfer; and
  • Case study lessons learned.

Session Four (March 16, 2017): Service Provider Due Diligence

Session Four looks at the growth in the Outsourced Chief Investment Officer (“OCIO”) and Fiduciary Management markets and explains service provider risk. Topics to be discussed include the following:

  • Fiduciary considerations of delegating investment responsibilities to third parties;
  • Risk mitigation practices for selecting and monitoring vendors such as asset managers and advisors;
  • Types of lawsuits that allege fiduciary breach on the part of third parties and related regulatory imperatives; and
  • Identifying warning signs of possible vendor fraud.

Fee: Fee includes access to all four live sessions (75 minutes each), access to the recorded session for 60 days, and digital program materials.

  • Sustaining Members: $355.00
  • Contributing Members: $395.00
  • Free/Non-Members: $465.00

Registration: You may register for this course by clicking on Register at the bottom of the page. For questions regarding registration please contact PRMIA at

Cancellation: A refund (less a 15% administration fee) will be made if formal notice of cancelation is received at least 48-hours prior to the date of the first session. We regret that no refunds will be made after that date. Substitutions may be made at no extra charge.

Important Notice: All courses are subject to demand. PRMIA reserves the right to cancel or postpone courses at short notice at no loss or liability where, in its absolute discretion, it deems this necessary. PRMIA reserves the right to changes or cancel the program. PRMIA will issue 100% of registration refund should cancelation be necessary.

CPE Credits: This webinar series qualifies for 6 CPE credits subject to certain rules about required attendance. Email for more information about obtaining continuing education credits.

About the Presenter:

Dr. Susan Mangiero is a forensic economist, researcher and author. With a background in finance, modeling and investment risk governance, Susan has served as an expert on numerous civil, criminal and regulatory enforcement actions involving corporate retirement plans, government retirement plans, hedge funds, private equity funds, foundations and high net worth individuals. She has been engaged by various financial service organizations to provide business intelligence insights about what institutional investors want from their vendors. As founder of an educational start-up company, Susan raised capital from outside investors, created a fiduciary-focused content library and developed a governance curriculum for institutional investors and their advisors. Prior to her doctoral studies, Susan worked at multiple bank trading desks in the areas of fixed income, foreign exchange, interest and currency swaps, financial futures, listed options and over-the-counter options.

Susan Mangiero is a managing director with Fiduciary Leadership, LLC. She is a CFA® charterholder, Professional Risk Manager™, certified Financial Risk Manager®, Accredited Investment Fiduciary Analyst®, Certified Fraud Examiner and Professional Plan Consultant™. Her award-winning blog, Pension Risk Matters®, includes nearly 1,000 essays about investment risk governance and has well over a million views. She is the creator and primary contributor to a second blog about investment compliance at Susan is the author of Risk Management for Pensions, Endowments and Foundations. Her articles have appeared in multiple publications such as RISK Magazine, Bloomberg BNA Pension & Benefits Daily, Corporate Counsel, American Bankruptcy Institute Journal, Mergers & Acquisitions, Business Valuation Update, CFO Magazine and the Journal of Corporate Treasury Management.

Susan has testified before the ERISA Advisory Council and a joint meeting of the Organisation for Economic Co-operation and Development (“OECD”) and the International Organisation of Pension Supervisors (“IOPS”). She lectured at the Harvard Law School and addressed groups such as the American Institute of CPAs (“AICPA”) – Employee Benefits Section, Financial Executives International, and the National Association of Corporate Directors. She can be reached at or followed on Twitter @SusanMangiero.

Effective Retirement Plan Communications

My blog post entitled "Simplifying Retirement Planning Communications" resonated with readers. It's no surprise that there are still discussions about how best to improve the information provided to participants. Given the amount of litigation alleging lack of transparency, sponsors are wise to offer understandable documents that can be used by employees and retirees to make financial decisions. According to "Improved Retirement Plan Communication Can Boost Confidence" (Plan Sponsor, December 15, 2016), it's not just content but the delivery format as well. Companies are adding more retirement readiness tools to their websites, even if participants are sometimes slow to take advantage.

Financial literacy is another issue that challenges employers and participants alike. Even when adequate information is available, the recipient may be unable to digest product descriptions or performance reports. In his write-up entitled "401(k) Communication Challenges," Dr. Richard Glass bemoans the low rate of financial literacy and its negative impact on saving. His take is that defined contribution plan sponsors "have not recognized that the participants' sense of distrust and their lack of knowledge can easily create a mindset that is conducive to inaction." He uses target date fund disclosures to exemplify his view that more should be done to put participants at ease and thereby motivate them to better prepare for life after work. His suggestions include the following:

  • Don't sugar coat the issue of risk but instead make it known that no product is free of uncertainty;
  • Emphasize that calculations are based on assumptions;
  • Hold "educational sessions that explain to participants why arriving at the assumptions involves a lot of crystal ball gazing and why, in spite of that fact, assumptions still have to be made" for purposes of forecasting; and
  • Supply "gap analyses that show participants how many years they can expect to receive their targeted inflation-adjusted incomes at their current contribution rates."

I agree that strengthening financial literacy is essential although I am not particularly sanguine about getting everyone quickly up to speed on concepts such as diversification and risk measurement. That's not to say that employers should look the other way. To the contrary, they should act even though some organizations will have to do more work then others. As I explain in another blog post, grade 12 proficiency in reading and math is abysmally low in the United States. Anyone who gets hired with a poor grasp of such basics may struggle with learning even elementary investing ideas. See "Employers Worry About Skills Gap That Impacts Bottom Line" (January 7, 2017).

Despite the fact that companies spent nearly $71 billion in 2015 on training, chances are those expenses will increase. Realistically, shareholders and taxpayers may have little choice but to foot the bill for further education of anyone not yet able to understand what it means to save now for later on. The Aegon Retirement Readiness Survey 2016 finds that "[A]round the world, many workers are heavily reliant on government benefits and are not saving enough to adequately fund their retirement income needs." Obviously there is no time like the present to prioritize thrift and prudent investing.

Simplifying Retirement Planning Communications

For many people, retirement planning tends to be an exercise in frustration. Some complaints focus on numbers that seek to dazzle without enlightening. Others call out language that is overly long, complex and ambiguous. The author of "HR communications falls short" (Benefits Pro, November 10, 2015) references a Davis & Company survey that validates employee angst as follows:

  • About compensation, only one out of four persons were satisfied with documents they received;
  • Regarding benefits, only fifteen percent said they were adequately apprised; and
  • Nearly ninety percent of survey-takers said they had not been provided sufficient intelligence about performance management.

These results are not good news for anyone. Shareholders are paying a company's staff to convey important information to retain and attract talented workers. If that's not happening, money is being wasted and that erodes enterprise value. It's likewise problematic for active employees and retirees. Without meaningful instructions and data, they are ill-equipped to make decisions about how to save and select benefits. As a forensic economist, I've worked on multiple matters that addressed the frequency, magnitude and clarity of participant communications. It's a real issue and costly when the task of communicating is done poorly.

Unfortunately, even when arguably clear and copious guidance is made available by an employer, some may resist reading and/or asking questions. As former Wall Street Journal reporter Jonathan Clements points out in "Don't Bother Reading This" (November 18, 2016), certain persons are focused on today and not tomorrow. He adds that others "want to believe in magic" even when evidence about investment returns suggest otherwise. Finally, he bemoans the association of "sophistication with complexity." (As an aside, I don't agree with Mr. Clements that complexity is "usually a ruse to bamboozle." However, I do acknowledge that complex economic arrangements require a thorough vetting of the risk-return tradeoff).

If my experience teaching on an investment cruise a decade ago is any indication, there are signs that financial empowerment through education is alive and well, even for those who learn on their own. Based on questions and comments I received, it was clear that the audience had a strong sense of what risks they were willing to accept and what they hoped to avoid. Admittedly, these were mostly small business owners who had grown and prospered over the years by understanding that doing one's homework is necessary to survive.

While investment uncertainty is, by its nature, something we all face, it is always prudent to gauge risks ahead of time, to the extent possible. Employers and policy-makers who want to help others improve their financial literacy can contribute in multiple ways. Joanne Sammer advocates in HR Magazine for a "whole portfolio" focus that encompasses all savings and retirement vehicles owned by an employee and his or her spouse. See "Helping Employees Plan for Retirement" (March 1, 2014). Based on my work in the benefits world, I suggest other prescriptions to consider as follows:

  • Listen to what your constituents tell you they need to know.
  • Understand the composition of your labor force since not every demographic cohort absorbs information in the same way.
  • Become adept at storytelling to make retirement planning relatable.
  • Make it easy for employees and retirees to ask questions and receive answers in a timely fashion.
  • Get creative with snappy visuals and relevant technology tools that encourage knowledge-gathering.
  • Monitor engagement patterns and revise your communications protocol as often as needed. 

Whenever I think about getting my message out, I reflect on something a former doctoral professor shared with his students. Taking some liberties since I don't recall his exact words, he required us to distill pages of terse text and equations into a single sound bite that a lay person could understand and care about. This drive to motivate the recipient to pay heed is undeniable. As Ryan T. Howell said in his Psychology Today article entitled "Less Is More: The Power of Simple Language" (September 20, 2012), concentrate on the problem consumers are trying to solve.

Applied to retirement planning, what's the end goal? For millions of people, the answer is not so much about having X amount of money in the bank but more about satisfying life goals and having "enough" to make things happen.

Emojis and Workplace Communications

In case you missed the party invitation, July 17 is World Emoji Day. There's even a snappy anthem if you feel like dancing and singing to celebrate this annual event. A Twitter search using the hashtag #WorldEmojiDay reveals favorites by country such as the yellow sad face (US, Canada, UK), red heart (Italy, France, Japan) and blue musical notes (Argentina, Brazil, Colombia). Interestingly, these emoticons are showing up in workplace communications on a regular basis.

According to "Nine perfectly reasonable reasons to use Emoji in a business context," the use of tiny images is said to add intimacy to otherwise impersonal messages, allow readers to "infer your mood and level of humor" and enliven "boring" presentations or corporate reports. Atlantic Magazine editor Bourree Lam explains in "Why Emoji Are Suddenly Acceptable at Work" that adding the popular happy face emoji can lessen the negative impact of "toneless" text that is typically interpreted in a negative way. Business etiquette expert Jacqueline Whitmore suggests senders should err on the side of caution by avoiding anything that depicts anger or romance. Client communiques should be formal.

My take as an investment risk governance expert is to play at home and not at work. Although I have inserted a smiley face or two during my career, my view (and that of many others) is that retirement plan communications are serious transmissions. Whether documenting fiduciary, investment and operational policies and procedures or giving instructions to employees about what to consider before signing up for benefits, there is a need for precision. Major lawsuits have centered on whether disclosures are sufficiently adequate. Binding regulations require transparency. Those in charge of implementing, monitoring and revising retirement plan decisions are ill-equipped when goals, restrictions and material facts and circumstances are vague.

I can't imagine a scenario where a happy face, pencil, bag of money or other type of cartoon clarifies versus confuses. Can you?

Pension Risk Matters Blog Turns Ten Years Old

A decade after its debut on March 23, 2006, Pension Risk Matters is still going strong with well over 1 million visitors and over 1, 000 commentaries. At the time of its inception, there weren't too many economic blogs devoted to topics such as pension governance and risk management. I'm not sure why. Then and now, these areas command attention. Nevertheless, I want to express my heartfelt thanks to readers, commenters and individuals who allowed me to interview them and also to Pensions & Investments for its recognition of Pension Risk Matters as a "best blog."

As I reflect on the last ten years of blogging, I decided to pen ten takeaways about my experiences. Here they are:

  1. Blogging can be enjoyable if you like to write (and I do). However, it does take time and not everyone has the inclination to research a topic, write about it and then edit their work. On average, I review each blog post for grammar, spelling and consistency two or three times before I hit the "publish" button. In addition, I test any embedded web or file links to make sure that they work.
  2. When it comes to blogging about a time-sensitive topic, not everyone can respond quickly. Many companies have social media policies that strictly prohibit an employee from posting to a blog or other platform without having content pre-approved by a compliance officer.
  3. A blogger should have a mission that makes it easy to return to the keyboard over and over. In my case, I have long been a believer in the importance of sharing information about industry trends and best practices. I strive for neutrality by writing in a way that hopefully educates and informs rather than taking an advocacy position about a particular investment or service provider.
  4. Identify a good technology vendor with whom you can collaborate. Originally, I created blog posts as part of a company website but soon found that approach wanting. As a result, I searched for a company that could provide added functionality. I ended up selecting Lex Blog to design Pension Risk Matters as a standalone blog destination. Later on, I asked Lex Blog to design a second blog - an investment compliance blog called Good Risk Governance Pays. Luckily I have not had too many reasons to contact customer support. When I have, they have responded quickly. Another advantage of working with a dedicated blog company is the ability to bounce ideas around about content delivery and enhancing traffic.
  5. Know the parameters of what is likely to work in terms of ease of use and access. Last year, I had Lex Blog migrate content on Good Risk Governance Pays to a responsive platform that allows readers to quickly view blog posts on a smart phone or tablet. I plan to do that soon with Pension Risk Matters.
  6. Add humor whenever possible. It's not easy to spin jokes about serious subjects such as due diligence or reasonableness of fees. What I do instead, when appropriate, is to choose colorful photos that stand out or begin a commentary with an attention-grabbing quote or anecdote. I'm always happy when readers tell me that they enjoyed reading a post because it was funny or at least memorable.
  7. If you use photos (and I recommend that you do), make sure that you have permission. I am a paid subscriber to several stock photo services, each of which has its own terms and conditions and rate schedule. Whenever someone contacts me with a request to use a photo, I suggest that they contact one of these photo services directly.
  8. Link back to earlier posts if it makes sense to do so. I mark each of my essays as belonging to one or more categories such as Fiduciary Education, Hedge Funds or Valuation. By doing so, life is simpler later on. I can click on any category link to refresh my memory about a preceding analysis that may have relevance to the topic du jour. For example, I just wrote about possible private equity obligations to a portfolio company with an underfunded pension plan(s). I did not remember the exact dates of an earlier set of posts I authored but clicked on Private Equity to quickly find four related posts. In a few minutes, I was able to retrieve and embed various links in my April 2, 2016 write-up.
  9. Be curious and stay abreast of industry happenings. This should be occurring anyhow, especially as the financial services industry continues to shake out from changing regulations, competitive pressures and market events. It's straightforward to set up Google alerts for various keywords and sign up for magazine newsletters. Make notes when attending conferences or webinars. Ask readers for suggestions about what they want to know. I never have a shortage of ideas. 
  10. Have fun. While true that numerous business bloggers commit time and money as part of an overall marketing and sales campaign, it is equally rewarding to be able to interact with professionals about how to stay current and seek to do the best job possible. If one of my blog posts is the springboard to such a discussion, so much the better.

Note to Readers: Many thanks again for your continued interest. If you want to guest blog about the financial services industry and are amenable to writing an educational essay, please email your topic idea and contact information.

Simplifying Investment Product Jargon

Being able to make an informed decision about what to buy is important and retirement products are no exception. If language is obtuse, confusing or otherwise difficult to understand, an investor may end up making an inappropriate selection or assuming too much risk.

Although each industry has its share of technical jargon, UK personal finance editor Simon Read thinks there is a "massive problem when it comes to financial services, with the pensions industry arguably the worst of the lot." In "Pension firms urged to use plain English" (Independent, March 2, 2016), he suggests that terms such as "flexi-access drawdown" or "safeguarded benefits" mean little to the everyday reader and are therefore not helpful.

In its 2014 Wall Street Journal compilation of "loathed investment jargon," American Association of Individual Investors ("AAII") executive Charles Rotblut explains "There is too often an assumption that everybody understands what is being discussed, when the reality is much different."

Naming a product for an investment strategy does not necessarily help the investor either, especially if the strategy means different things to different people or has multiple monikers. Products that are part of the smart beta family come to mind.

According to the Financial Times, their use is "swelling," with assets of around $400 billion or one fifth of the $1.7 trillion Exchange Traded Fund market. At the same time, this strategy has no singular definition or name. Ben Johnson with Morningstar describes terms such as "smart beta" and "enhanced indexes" as a "broad and rapidly growing category of benchmarks and the investment products that track them." See "A Sensible Approach to 'Smart Beta'" (Morningstar, May 14, 2014). Eric Balchunas with Bloomberg writes that "Few can define it..."

A 2015 investor alert, issued by the Financial Industry Regulatory Authority ("FINRA"), describes a smart beta index as one that is "based on measures other than weighting by market capitalization" and gives examples of labels being used to market these products. Their recommendation is that interested persons pose six questions before purchasing as follows:

  • What is the product's strategy?
  • What are the costs?
  • What are the potential advantages?
  • What are the potential risks?
  • How liquid is the product and its holdings?
  • Are the performance figures back-tested?

This is not a universal list of questions to ask nor is this type of risk-return inquiry unique to smart beta products. Investors and their advisors should be kicking the proverbial tires on any product being considered. Retirement plan fiduciaries need to do likewise on behalf of plan participants. The message remains the same. In order to make an informed decision, it is important that product language is clear and easy to understand.

Speaking of words, logophiles have cause to celebrate. March 4, 2016 is National Grammar Day.

ERISA Investment Committee Governance

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

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

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

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

Fiduciary Education Considerations

Rumor has it that regulatory exams of retirement plans continue to include explicit questions about whether a formal education program exists and, if it does, what it contains. Certainly the topic is not new. In 2002, the Working Group on Fiduciary Education and Training made recommendations to the U.S. Department of Labor to include the following:

  • Ensure that everyone understands that a fiduciary must "perform competently" which means, by extension, that he or she must be educated about duties and responsibilities;
  • Appoint someone to lead fiduciary education and outreach on a national basis;
  • Expand guidance as to what constitutes "best practices," adding to guidelines such as "A Look at 401(k) Fees for Employers";
  • Recognize that fiduciaries of smaller plans will likely have different training needs than those of larger plan fiduciaries; and
  • Provide helpful tools such as a dedicated hotline, a primer about fiduciary duties and conferences. 

A visit to the U.S. Department of Labor website entitled "Getting it Right - Know Your Fiduciary Responsibilities" yields a treasure trove of educational publications and hyper links to various online tools such as The ERISA Fiduciary Advisor. In addition, there are countless organizations that provide extensive fiduciary programs, some of which lead to certifications should one pass exams and meet experiential mandates. I myself have both taken and led various workshops about investment fiduciary subjects and continue to satisfy the requirements to be an Accredited Investment Fiduciary Analyst.

Yet with the plethora of available information about what it takes to carry out one's fiduciary duties, allegations of breach continue and on a grand scale. During a recent program entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors," my co-presenters and I talked about the importance of education and the consequences of not being up to speed on what has to be done on behalf of participants.

Some have suggested that formalizing a training requirement makes sense, adding that guidelines can demonstrate good faith and thereby serve as a defense in the event that a lawsuit is filed against investment fiduciaries down the road. Others counter that too much specificity may not allow for changes in circumstances or be inadequate to the multiple tasks of selecting advisors for more than one specialized asset class or strategy. 

Based on my experience, documentation about how internal fiduciaries are selected, let alone developed, is something of a rare bird. Likewise uncommon is a written policy that explains how investment committee members should be evaluated in terms of performance and by whom. In contrast, nearly all jobs have a specified description, an established pay scale and clear criteria about what makes for a "good" job versus performance that is deemed "unacceptable." Though one might be tempted to conclude that the absence of a formal procurement protocol for a retirement plan fiduciary means that the role is unimportant, nothing could be further from the truth. Serving as a fiduciary is a real job in every sense of the word and should be acknowledged accordingly.

National Doughnut Day and Retirement Plans

In case you didn't know, today is National Doughnut Day. According to ABC News, Cumberland Farms and Krispy Kreme are a few of the sellers that are giving out freebies in celebration of this longstanding holiday. In its May 28, 2015 press release, Dunkin' Donuts (another participating retailer) informs that the holiday has been around since 1938, having been created "to honor women who served donuts to soldiers during World War I." The history of this sweet treat goes back even further. Smithsonian Magazine chronicles the popularity of the doughnut, citing its introduction to Americans by the Dutch when Manhattan was called New Amsterdam. Since then, sales have soared with 2012 doughnut store revenue reported at $11.6 billion.

Presumably free doughnuts generate sales of other products like coffee or tea and that is one motivation for holiday largesse. Another motivation for giving things away has to do with product branding. The Chief Marketing Officer Council website touts a 2015 global estimate of $540 billion as the amount that companies expect to spend on advertising. I experienced this firsthand when I recently spoke at the Government Finance Officers Association annual conference. Before my session, I perused some of the booths in the exhibition hall. I now have stress balls, pens and tote bags that sponsors gave away in droves to ensure continued name recognition. Two days ago, the subject of branding came up again when I met with the general counsel of a large financial institution. He specifically used the term "building the brand" when describing transparency and good governance as a way to differentiate his firm's offerings to pension funds, endowments and family offices.

This got me thinking about benefits that employers offer to attract new employees and retain existing talent. Jen Schramm writes about a 2014 survey in "Which Benefits Attract Highly Skilled Workers?" (Society for Human Resource Management, April 1, 2015), stating that health care, retirement and leave arrangements "were the top benefits used to retain employees at all levels of an organization." This finding leads to logical questions about (a) how employers are branding the benefits offered in seeking to fill jobs and (b) whether only well-funded and viable plan benefits get promoted to newcomers and existing workers.

Understanding some basics about branding helps. Mark Di Somma recently addressed the seven R's of a powerful branding strategy to include the following:

  • Resonance - Does a brand "talk to people's needs in ways that feel personal, relevant and wonderful?"
  • Resilience - Does the brand create a competitive advantage?
  • Results - Will the brand add to the bottom line?
  • Resolution - Is the brand inspiring and "Does it align with the vision and the purpose?"
  • Radiation - Will the brand generate positive conversations?
  • Redefinition - Does the brand dazzle or simply move the deck chairs around?
  • Recognition - Does a brand build on what customers (in my example, employees and prospects) already know?

His points can be applied to the offering of various benefits and related communications with participants. Based on my experience as a forensic economist, numerous cases on which I have worked in the last few years allege poor communications and rescinded benefits (even when perception differs from reality). In brand parlance, this means there is low resonance, low resilience and low resolution. Participants do not feel that the benefits meet their needs. Increased costs relating to factors such as longevity are reducing the bottom line and forcing lots of companies to rethink whether certain benefit programs should be maintained. Underfunded and badly managed benefits can lead to negative "radiation" as reflected in the growth of putative ERISA class actions with multiple disgruntled employees willing to serve as plaintiffs.

The topic of benefits "branding" (i.e. using benefits to attract and retain talent as a way to create enterprise value) is far from trivial. Companies throughout the world are seeking to balance the costs of offering benefits against the hope that a generous HR mix helps shareholders too. It is certainly food for thought, in between bites, for those who plan to munch on a free doughnut today.

Pension Risk Governance Blog Still Going Strong After Nine Years

Nine years today marked the debut of Since then, I am proud to say that traffic has steadily grown, with continued feedback and suggestions about all sorts of topics. I am deeply grateful to visitors to this independent website for their time and encouragement. While the specific feedback tends to vary by issue or job function, a central theme is clear. Ongoing education about topics such as due diligence, fees, risk management, asset allocation, hedge funds, liquidity and valuation is both needed and desired. In 2015, this award-winning blog will continue its focus on providing objective and helpful information about important subjects that challenge investment stewards and their advisors, attorneys and regulators who oversee the management of more than $30 trillion.

As I point out in "Financial Expert Susan Mangiero Celebrates Ninth Year as Lead Contributor to Pension Risk Governance Blog" (Business Wire, March 25, 2015), "There is never a shortage of subjects to discuss, thanks to ongoing suggestions and contributions from readers and the significant realities of changing demographics, market volatility and new accounting rules."

To date, there are over 900 published analyses, research updates and guest interviews that can be readily accessed by category and keyword. Simply click on the Archives section of For a complimentary subscription to this blog, as posts are published, click here to sign up. Click here to read our Privacy Policy. If you are interested in contributing an educational essay or letting us know about a relevant news item or rule change, please email

Until the next blog post, thank you for your interest!

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 " 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, 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.

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:


  • Dr. Susan Mangiero, Managing Director, Fiduciary Leadership


  • 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!

Deciding When to Tweak or Overhaul a Pension Plan

People in my family buy things to last. It doesn't always work out the way we want. For example, we can't watch internet movies through our television set because we have yet to upgrade to a newer box that has the technology to allow this to happen. However, sometimes it is better to upgrade, even if there is a short-term incremental cost to do so. I learned this lesson the hard way in recent weeks. Sick of an old laptop that constantly froze on pages with too many graphics and a printer that only worked when I cleaned the print head (and that became a frequent occurrence), I made a beeline to Staples. During my discussion with the technology salesperson, he agreed with me that the immediate outlay of buying new productivity tools would be a lot cheaper than upgrading with the purchase of a few parts. The speed, storage and ability to use newer versions of software were a few of the advantages we discussed.

Change can be a good thing or not. The concept of evaluating when to tweak plan design or asset allocation mix (or a host of other decisions), as compared to carrying out a complete overhaul, applies to retirement plans. Of course this assumes that it is even possible to modify. For a defined benefit plan that is grossly underfunded or a defined contribution plan that is set up to keep workers happy by offering a particular group of investments, reversing course could be problematic. On the flip side, a sponsor that can effect change that would be deemed advantageous by participants but does not take action could be accused of bad practices or worse. Keep in mind that lots of ERISA lawsuits allege actions that a fiduciary committee could have taken. The important thing is to be vigilant about what has to be done on an ongoing basis and respond accordingly,

At least some plan sponsors are taking heed of the need to review where things stand. According to a recent Aon Hewitt survey, 62 percent of polled 220 U.S. companies with traditional pension benefit offerings vowed to "adjust their plan's investments to better match the liabilities in the year ahead." Some respondents affirmed their intent to consider increased allocations to fixed income securities and hedging strategies, once their funding status improves. One out of eight companies queried are evaluating plan funding status as often as once per day. Click to download "2014 Hot Topics in Retirement: Building a Strategic Focus."

I have a t-shirt that reads "Change is good. You go first." It always makes me chuckle. Even when change is not warranted, it is important to demonstrate that at least someone has thought about risk factors and alternative ways to mitigate those identified uncertainties.Maybe the t-shirt should instead read "Assessing whether change makes sense is an important part of a fiduciary's responsibilities."

Enterprise Risk Management, Board Governance and the Art of Cleaning Dirty Dishes

Old habits sometimes die hard. In my husband's case, he insists on soaking the dishes before putting them into the dishwasher. I prefer to scrub them with a sponge, rinse and put them aside until the current load is finished, the machine is emptied and there is room to add the next set. After twenty-two years of otherwise marital bliss, you would think that we would have the whole kitchen clean-up dance choreographed and down to a science. Yet, here we are on a Sunday night, talking about the best way to clean the dishes...again. The good news is that we have squeaky clean dishes. The less than good news is that it would be better in my view to discuss the issue thoroughly, agree on a process and then allocate work accordingly instead of each of us spending time on a basic task that should be easy enough to master without repeatedly going over the same thing.

Now if talking about cleaning dishes is the extent of disagreement in any relationship (marriage or otherwise), life is good. It does get you thinking however about interpersonal dynamics, leadership and how to accomplish a goal, especially when things are more complicated.

Managing enterprise risk management ("ERM") is a good example of a task that requires care and coordination and is arguably more complex than pulling out a scrub brush. According to a recent McKinsey & Company survey about improving board governance, others concur. In their August 2013 write-up of results, authors Chinta Bhagat, Martin Hirt and Conor Kehoe write that "...most boards need to devote more attention to risk than they currently do. One way to get started is by embedding structured risk discussions into management processes throughout the organization."

In "Risk Management and the Board of Directors" by Martin Lipton et al (Bank and Corporate Governance Law Reporter, February 2011), the role of oversight is distinguished from "day-to-day" risk management. The authors write "Through its oversight role, the board can send a message to the company's management and employees that comprehensive risk management is neither an impediment to the conduct of business nor a mere supplement to a firm's overall compliance program, but is instead an integral component of the firm's corporate strategy, culture and business operations."

According to a 2009 publication entitled "Effective Enterprise Risk Oversight: The Role of the Board of Directors" by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), board oversight entails several important actions. These include the following:

  • Comprehend an organization's philosophy about risk and "concur with the entity's risk appetite," otherwise defined as its risk tolerance for alternative ways to create shareholder wealth;
  • Assess whether management has put effective risk management processes in place in order to identify, measure and manage key sources of uncertainty;
  • Regularly carry out a study of an organization's portfolio of risks in the context of stated risk tolerance goals; and
  • Evaluate whether management is "responding appropriately" to factors that could seriously erode enterprise value.

Hopefully, readers agree that the topic of risk management oversight should be important to pension plans and other types of institutional investors that invest in companies directly or by purchasing corporate stocks and bonds. Looking askance or ignoring the topic altogether is ill-advised.

In a recent conference call about vendor selection for a relatively large ERISA plan, I was surprised when one of the callers admitted to not having yet vetted the risk management controls in place for a candidate service provider. Worse yet, he thought doing so was a bad idea since "the numbers spoke for themselves."

Certainly insurance underwriters are taking a further look at their exposure. Professors David Pooser and Kathleen McCullough, on behalf of the Professional Liability Underwriting Society ("PLUS") Foundation, explain that more attention is being paid to the oversight role of directors in the aftermath of recent financial crises. In "How is Enterprise Risk Management Affecting the Directors' and Officers' Liability Exposure?" (September 1, 2013), they write that "Better governance control through ERM should make a firm a more appealing risk for D&O insurers to write. ERM becomes especially important if it signals that the corporation is less risky and better controlled than others, and therefore may be a useful tool to D&O insurers, regulators, and other monitors."

Understanding Directors and Officers ("D&O") oversight of a firm's enterprise risk management activities is not exactly the same thing as settling on how best to get the dishes clean. However, both activities are important, require that collaborative discussions take place and actions ensue.

Remembering Nell Hennessy

According to the website for Fiduciary Counselors, Attorney Nell Hennessy passed away on February 4, 2011. I did not know Nell too well but found her to be amazingly generous with her knowledge of the employee benefits industry. She took time from what I'm sure was always a busy schedule to share her passion for best practices. An industry leader, she worked tirelessly throughout her distinguished career on behalf of plan participants. Interested persons can read the statement posted by her colleagues by visiting In Remembrance, Nell Hennessy.

Can Great Cards Overcome a Complex Strategy?

Thanks to my husband's astute coaching, I'm becoming a big fan of bridge. Each hand presents a new challenge. In addition to deciding how to play my cards, I have to take my partner's thirteen into account as well as what we need to successfully complete the rubber. I confess that scoring remains a mystery and I'm still unclear as to how to execute certain plays. For example, the other night, I had four aces, three kings and a few queens and jacks but not much of a long hand in any suit. Somewhat of a novice, I took the safer road of bidding a particular suit rather than pursuing a "no trump" course of action. Much like bridge, institutional investors often face choices about what to do.

  • Having adequate resources does not necessarily equate to easy choices about asset allocation. I had a terrific start (lots of face cards) but did not want to risk losing the hand by following a strategy with which I was unfamiliar. Additionally, I did not want to let my bridge partner down. In pension land, having lots of money to invest should not equate to a "bet the bank" mentality (i.e. adopting an overly complex approach). Moreover, the interest of beneficiaries (like other partners) must be taken into account.
  • Some losses are imminent. Sometimes a few cards are purposely lost in early rounds as a way to gain a superior position for an ultimate win. In investing, markets can bounce around, tempting institutions to pull and run. Establishing trading limits that comport with pre-established goals and risk tolerance levels makes sense. Confusing long-term goals with short-term actions can sometimes be costly and ill-advised.
  • Switching partners from time to time offers fresh insights but is likewise hard work. Bridge takes a round robin approach that rattled me at first. After all, if I was winning with a particular partner, why should I have to change? What I've learned is that each new pairing requires a re-examination of the relationship, especially a focus on how to properly communicate with one another. While some investment relationships are ongoing, many are not. The need to clearly exchange mission-critical information is an important skill. Just as any failure on my part to discern my bridge partner's intent during the bidding process can lead to ruin, so too can a breakdown in communication between asset owner and advisor. As the consulting industry consolidates in favor of larger organizations, client communications will be tested as parties get to know each other from scratch. (Note: Interested readers may want to check out "Consultant market set for further contractions," Professional Pensions, April 30, 2010.)
  • Skill is essential but sometimes luck dominates. As much as I focus on learning the game, bridge can frustrate. If you are dealt a bad hand, you simply have to get through it, be patient and know that discipline is not a guarantee of high returns. Investing is much the same. A good process is paramount but does not mean that a portfolio's return in any given quarter is going to outbeat a particular target.
  • Know where you are going. Journalist Chuck Palahniuk observes that "If you don't know what you want, you end up with a lot you don't." If I stop thinking ahead several plays in bridge, I will unlikely miss my chance to win a particular hand. If an asset owner falls short in proper goal-setting, achieving objectives is going to be hit or miss and could certainly induce all sorts of unpleasant consequences - economic and regulatory.

Finally, bridge requires thought and hard work but can be tremendously rewarding. I learn new things all the time. The life of an investment decision-maker is challenging at best and exposes individuals to tremendous fiduciary liability at worst. Yet numerous professionals make pension stewardship their life's work because it is fulfilling, interesting and satisfying.

Target Date Fund Fiduciary Checklist - Coming Soon

According to the U.S. Department of Labor's website, plan sponsors will soon have a fiduciary checklist about how to evaluate and select target date funds as part of the 401(k) plan mix. Given that nearly one out of two plans offer target date funds as an investment choice and that there are numerous questions about related investment best practices, the guidance comes none too soon. Click here to read more about the Spring Regulatory Agenda of 2010.

The Lawyers Are Coming

Law scholar, author and derivatives pundit Frank Partnoy had an interesting piece in the Financial Times on April 19, 2010. In "Wall Street beware: the lawyers are coming," Mr. Partnoy warns that the floodgates of litigation are about to open with the SEC's filing of a fraud lawsuit against Goldman, Sachs & Co. He asserts that the regulatory enforcement takes complex financial alchemy and spins a "morality tale." A second take is that litigation picks up where regulations stop with Wall Street heretofore having interpreted "detailed rules as a shield from liability."

Leaving the Goldman case aside (as only those involved can opine with the clarity of full information), Professor Partnoy provides food for thought. Indeed, as I have written lo these last four years since the inception of this blog, Main Street pain invites legal and regulatory action. Investment losses are vote killers for elected officials who turn a deaf ear to calls for change.

I agree emphatically with the notion that regulations can only do so much.Worse yet, regulations could lull market participants into having a false sense of security. Post implementation of new rules and regulations, investors might think that all is good with the world when the truth could be the polar opposite, i.e. "compliance" having masked a host of bad practice nasties. I've often made the point in print and at the podium that onerous mandates induce the Law of Unintended Consequences, leading to a costly and counterproductive outcome that is antithetical to the original problem. Pick any accounting rule or regulation and it's possible to show the costs and benefits in terms of changed behavior.

There are noble-minded regulators and attorneys alike who really want to make a difference on behalf of the ultimate beneficiaries - retirees, shareholders, taxpayers, working families and so on. They are going to be beyond busy in the coming months and years unless, and until, investment stewards in need of improvement snap to. The wagons are circling. Count on luck or hunker down and get a good fiduciary risk management process in place ASAP. Otherwise, start preparing for deposition.

Editor's Note: Click here to read "Tips From the Experts: Working Effectively With A Financial Expert Witness" by Susan Mangiero (Expert Alert, Summer 2008, American Bar Association). While we prefer by far to help asset owners and their advisors before the fact, call us if you need help with "after the fact" analysis.

Finding Meaning Even After 30 Years

I had the great pleasure of attending a dinner the other night to honor university professors who have been working at Iona College for more than 20 years. My husband's tally is 30 (teaching finance). One gentleman came in at 50 years, inspiring young minds with the written word as a professor of english. Somewhat curious, I asked attendees over dinner why they stayed in one place. The response was pretty much the same across the board with answers that referenced colleagues as a second family or the satisfaction of helping students come into their intellectual own.

At a time when some employees at various organizations are treated as temporary visitors, rather than partners in building a better mousetrap, something as seemingly simple as a celebratory dinner of service, past and future, touches the heart. While teaching is often thought to have its own intrinsic value, it is worth noting that any job well done is likewise worth a round of applause. As I've said many times, the notion of service applies to the many men and women who take their jobs as investment stewards seriously. They understand that their every action makes a difference. Bravo!


Just a Spoonful of Sugar Makes the Medicine Go Down...






Mary Poppins came to mind the other day during a panel discussion about governance and the role of the institutional investor.

Part of a conference about fiduciary obligations, I joined Mr. Stephen Davis (Executive Director of the Millstein Center for Corporate Governance & Performance - Yale School of Management) and Ms. Janice Hester-Amey (Portfolio Manager, Corporate Governance - CalSTRS) for a discussion about governance. I believe we were successful in kicking off the day long event with some thought-provoking tidbits. We covered new rules that, if passed into law, should empower pensions, endowments and other asset owners. We opined on regulation versus voluntary action. We had a lengthy exchange about what motivates institutions and whether governance was now considered a "must do" that contributes to return versus a "try to ignore" because it is seen as a drain on resources.

In the words of this famous nanny, find the fun and the job's a snap. I'm not sure that governance will ever top the list of jollies but one does wonder when best practices will stop getting lip service and instead merit the attention it so richly deserves. Chief Governance Officer anyone?

I added commentary about what I believe fervently is an inevitable industry move towards scoring with respect to process (not the same as outcome). Several legal professionals in the audience suggested that any type of benchmark would necessarily offer limited value because of subjective bias (their words, not mine) on the part of those who construct the ABC report card.

I don't necessarily concur. There are MANY points on which rational investment stewards would agree as no-brainer elements of what is right.

For those readers who want to get my specific take on what they are and how to monetize what I think is a great opportunity, contact me. Our firm is looking for solid partners on a few initiatives that we believe break the mold in anticipation of the brave new world of indexing procedural prudence.

Benchmarking the Investment Industry


In my September 11, 2008 testimony before the ERISA Advisory Council, I described two buckets of organizations - those which deserve a gold star and those who don't. I went on to explain that the size of the "everybody else" bucket might be very large but that current reporting requirements make it nearly impossible to know about red flags in advance. This is cold comfort for shareholders and taxpayers who would prefer to know about financial runaway trains beforehand.

Unfortunately, those who attempt to provide more sunlight about their activities are not always rewarded. In a recent conversation with the CEO of a major asset management firm, I was told that this firm had provided detailed information about its fee structure to institutional clients. Instead of being rewarded, and because there are wide variations with report to how asset managers present performance data, sunlight led to storm clouds. Endowments, foundations and pensions responded by asking why the fees were so high. The reality was that the costs were in fact lower than those of comparable traders but, since competitors were not providing more than basic feedback, their costs were interpreted as lower and therefore "better." It's no surprise that the executive with whom I spoke expressed frustration. Here they were trying to do what they thought was the right thing and come clean with a detailed decomposition of what they charged. Instead of a reward, they were kicked in the proverbial shins.

In "Type-A-Plus Students Chafe at Grade Deflation" (January 29, 2010), New York Times reporter Lisa W. Foderaro describes a similar phenomena in the university sector. Where Princeton sought to minimize grade inflation by limiting the number of A's, top quality students found it harder to compete for jobs when graduates from other schools flashed their scores. Never mind that Princeton arguably tried to impart higher integrity data.

Is the message that transparency is window dressing and that no one really wants to have the low down on "true" outcomes? Alternatively, should we conclude that heightened disclosure rules are inevitable but it is incumbent upon providers of information to educate their recipients, i.e. make sure that underlying assumptions are clearly explained? If that does not occur, might well-intended parties (those who provide more detail than necessary) be impugned instead of rewarded for their forthrightness? 

Editor's Note: Click to read "Testimony by Dr. Susan Mangiero to ERISA Advisory Council Working Group on Hard to Value Assets," September 11, 2008. (Note that Pension Governance, LLC is now part of Investment Governance, Inc.)

Business Etiquette: Handshake or Kiss?

Etiquette is important but sometimes more an art than a science. Consider my close encounter today with a gentleman whom I respect and like as a perfect example of trying to figure out what to do, without offending anyone or seeming "uncool."

Here's what happened.

In between meetings, I stopped by a local cafe to pick up a sandwich. To my delight, I spied said gent having lunch with colleagues, deep in conversation. When he saw me, he signaled to his colleagues that he was taking a break, came over to say hello and gave me a kiss on my cheek. If memory serves, I think my face grazed his, I passed him a business card (reflecting new contact information), offered a 60 second update on our business and held out my hand for an exit that may have been, in hindsight, anything but graceful.

Paying for my take-out order, I wondered if his buss, followed by my handshake, was an insult. Keep in mind however that this is suburban CT, not Paris. Should we have pecked cheeks again as a more appropriate sendoff, simply said goodbye or nixed the face action to begin with?

It's all so complicated.

I'm sure Jerry Seinfeld could get a lot of chuckles with this topic. Apparently, he had an episode about the "Kiss Hello" though I did not see it.

According to New York Times reporter Elizabeth Olson, "the cheek, or social, kiss is displacing the handshake, once the customary greeting in American social and business circles" but just make sure you get the positioning right. See "Better Not Miss the Buss" (April 6, 2006).

In "Do you shake hands, hug or kiss?" (April 12, 2006), Today Show anchor Al Roker and now prime time news gal Katie Couric acknowledge that a kiss is okay when you know the colleague well but head for the right cheek. Leaning left is outre. Their guest Peggy Post suggests a firm grasp of the hands instead, but "no pumping." Grasp the hand and be done with it. Other suggestions include an air kiss or double peck.

I'm not sure I will remember all of these greeting "do's and don'ts."

It was a special surprise to bump into this smart, funny and high integrity colleague, even if I didn't get the hello and goodbye parts down right.

Linking this topic back to investment matters, is there a protocol for the buy side - service provider reviews that take place every quarter? For example, if an asset manager has lost money for an institutional investor, does that nip any chance of a hug or smooch, no matter how long the relationship? Are puckers prohibited for service contracts above a certain amount or when a discussion is unduly serious? When is the double or triple cheek kiss appropriate? What if two parties are from different countries and the buss rules conflict with each other?

Let's see if Miss Manners can help.

Dr. Susan Mangiero to Keynote Audit World 2009

I have the great pleasure of being one of two keynote speakers as part of Audit World 2009. My speech, entitled "Navigating the Auditor Hot Zone: Helping Investors Through Volatile Financial Markets," will include case studies from the trenches with respect to prudent process, hard-to-value investing, modeling and much more.

Always important, auditors are increasingly finding themselve in a position of providing pro-active guidance to their clients about complex rules and markets alike. It's no surprise then that institutional investors tell us that what, when and how auditors opine is of critical importance. Lack of uniformity in what auditors advise is a stated concern. On the flip side, auditors worry that pensions, endowments and foundations are asking too much of them, forcing an uncomfortable situation that blurs oversight with execution of essential duties.

Please join me for what should be an exciting and topical event. Sponsors of Audit World 2009, the MIS Training Institute, have put together a "case study-driven, information-rich program in four defined tracks: Financial Services, Non-Financial Services, Manufacturing and Best Practices."

Click to download the conference brochure for Audit World 2009 from September 15 through 17, 2009 in Boston, Massachusetts. If you register before August 29, 2009, you are entitled to a 10% discount off the regular conference fee.To take advantage of this special discount, you must contact MIS Training Institute’s Customer Service and reference the following priority code when registering: AW09/PRM. The discount offer cannot be used in conjunction with any other discount offer or on previous registrations. Contact the MIS Training Institute by telephoning 508-879-7999 or sending an email to

Does Your Plan Have an Effective Travel Policy?


According to "Detroit pension trustees take flight on funds' tab" (June 14, 2009), Detroit Free Press journalist Jennifer Dixon ponders how much is too much when it comes to trustee travel. I agreed to speak on the record about general best practices and want to add that I am not familiar with the situation in Detroit. I have excerpted my comments below:

"Susan Mangiero, president of Pension Governance Inc., an independent research, analysis and training company in Trumbull, Conn., said public pension plans need 'a clear policy about travel...It's public money, and taxpayers and plan participants would like to know the money is being properly spent.'"

I further suggested that an effective policy should address whether vendors are allowed to pay for trips, adding that "It's important to have policies on what is deemed to be a legitimate and reasonable expense, from a governance aspect and budget aspect."

Given the current environment of cutbacks and layoffs, a review of what constitutes prudent and necessary travel is a no brainer. An effective policy should also lay out rules for travel, conference attendance and so on when the fund has hired an outside consultant or fund of funds manager who is supposed to be doing some of the legwork along the way.

We've heard anecdotally that many pension decision-makers are being discouraged if not outright banned from taking trips right now, urged to fly coach, share hotel rooms and/or otherwise drastically reduce cash outlays.

For those who have yet to adopt a comprehensive travel policy for investment fiduciaries, bon voyage!


Money, Happiness and Governance

In case you missed it, April is National Humor Month. Created by "best-selling humorist Larry Wilde, Director of The Carmel Institute of Humor," 2009 marks the 33rd anniversary of this celebration of fun and merriment.

For those who live in Nebraska, they must really be rolling in the aisles. What? You didn't hear?

According to a survey conducted by, the home of Cliff Notes ranks top for its low number of foreclosures, low unemployment rate and low percentage of non-mortgage debt by income. Not surprisingly, Connecticut, where I call home, is number 28 out of 50 on the Happiness Index (not a good thing by the way). Being close to Wall Street, we are feeling the pinch of financial layoffs and plummeting portfolio values. California, Florida and Oregon rank 48, 49 and 50, respectively.

Along the lines of "feel good" action, I read an interesting article in the May 2009 issue of Reader's Digest in which Stanford University psychologist Carol Dweck advocates the benefits of failure. According to "How Failure Makes Us Stronger," psychology and neuroscience professor Antoine Bechara has identified two parts of the brain that are responsible for the "fear of failure" and the "lure of success." For certain individuals, the physiological response to failure is a chance to learn.

At a time when many professionals feel under siege for economic losses or sub-par performance or both, one silver lining may be new math, i.e. Failure = Second Chance.

Unfortunately, recent research suggests that not every one is ready to act anew. According to "Managers fail to control hazards" (April 6, 2009), Financial Times reporter Sophia Greene says "not so fast." Citing results of a new risk management study, certain factors such as liquidity risk have not yet "been built into risk models," possibly leaving portfolio managers (and therefore pensions, endowments and foundations) unduly exposed. In contrast, investors are described as committed to asking asset managers about risk management policies, with 10 pages of a typical Request for Proposal ("RFP") being dedicated to "risk of all sorts." In its press release, survey sponsor SimCorp describes "the lack of monitoring of strategic risk" as a concern, along with a less than robust commitment by senior management as reflected in its analysis. For an overview of other findings, read "Global survey reveals that risk function has lost status despite financial crisis" (April 1, 2009).

Recall that Pension Governance, LLC (now Pension Governance, Incorporated) and the Society of Actuaries discovered a similar lack of enthusiasm about risk management and fiduciary duties in its research. Click to access the 69-page study entitled "Pension Risk Management: Derivatives, Fiduciary Duty and Process" by Susan Mangiero. For an overview of that research, read "New Study Addresses Pension Risk Management Gaps" (October 13, 2008).

Can looking the other way make for a happy institutional investor or asset manager? Hopefully, the final answer is "no" and "open to improvement" wins the day.

Having Good Investment "Hair" Is Important

Today was the end of the first calendar quarter and the deadline for mailing the annual $250 business entity tax check to the State of Connecticut. No longer Pension Governance, LLC (we are now organized as Pension Governance, Incorporated), this little act marked our final payment of what I call the "just because we can" tax. But I digress.

As I got to the local post office, minutes from their 5:00 p.m. closing, I asked the nice man behind the counter to postmark it for today, evidencing that I mailed the check on time, like a good business doobie. As he processed my letter, Bob remarked how much he liked my new hair style. Taken aback a bit (because I had not combed my hair before I jumped in the car), I realized that Bob perceived my do as new and hip (some version of the wild gal look). For those who know me, my favorite outfit is yoga pants, a teeshirt and sneakers, with minimal time spent on fancy makeup and coiffs. (Men are so lucky - no heels, no mascara.)

This humorous encounter (Bob is a nice man, always friendly and helpful.) got me to thinking about investment best practices and the extent to which so few organizations publicize their good deeds.

If a plan sponsor or service provider is going to spend time, money and other resources to embark on a robust fiduciary-focused process (regardless of plan design focus), why not flaunt it? No doubt plan participants, shareholders and taxpayers alike want to know that their money is in good hands. On the flip side, how many organizations come to mind that do a poor job but are perceived as being "good guys and gals" (i.e. didn't comb)?

Wouldn't it be great to go beyond numbers and instead have information such as:

  • Who persons the investment committee (experience, education, relationships with vendors)
  • How often they meet
  • How they make decisions on managers, strategies and so on
  • What internal controls are in place to avoid conflicts of interest and potential runaway losses...?

Isn't it time that we separated the good hair from the bad hair?

2008 Bonuses Deserve Scrutiny


Wall Street executive compensation is a big story these days. Given the importance of the topic and the impact on institutional investors, I accepted the invitation to write a guest op-ed piece on the topic for Fund Fire, an Information Service of Money-Media, a Financial Times Company. I've included the article below and welcome your feedback. Click to send an email with your opinion about this topic. Shown below is my piece entitled MoneyVoices: "2008 Bonuses Deserve Scrutiny" (February 12, 2009).

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Fund Fire Editor’s note: This MoneyVoices column is a follow-up to last week’s editorial, Money Voices: "A Case for 2008 Bonuses." That article provoked a record number of reader comments, with many stating their disapproval of bonuses amid the downturn.

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                       "2008 Bonuses Deserve Scrutiny" by Dr. Susan Mangiero

As an advocate of free markets and industry-self regulation, I find myself in a real philosophical pickle on the issue of Wall Street compensation during this economic downturn.

I fervently believe that compensation should be determined by supply and demand, even if the resulting payouts are deemed “too high” by persons outside a particular industry. At the same time, I am disturbed by what seems to be a material disconnect between employee performance and monetary compensation in the financial industry.

Rewarding individuals for doing a bad job is never a good idea, regardless of whether taxpayers or shareholders are footing the bill. At least company investors get a say on pay structure in the form of one vote per share. The average taxpayer has no immediate voice, other than to complain to legislators or use the ballot box at the next election.

The status quo is almost surely a populist no-go. Change in some fashion is inevitable. The good news is that institutional giants – pensions, endowments and foundations – can and should play a role in leading serious discussions with their Wall Street service providers, including money managers and consultants, about their staff’s compensation.

One might even suggest that it’s an institutional investor’s fiduciary duty to inquire about how much of their fees are being used to reward portfolio managers, traders, analysts and other key persons, and on what basis. If they don’t like what they hear, they vote with their feet, engaging other firms they deem less egregious in terms of pay. Capitalists can sleep at night with this approach since it links buyers’ demands (for compensation transparency) with supply (payment of reasonable, risk-adjusted, performance-linked pay).

Remember, though, that asymmetric payoffs do little to properly motivate workers, so their banishment is good news to anyone who believes in a job well done. In an ideal world, professionals reap the fruits of their labor by selling their bundle of skills to willing buyers at an agreed upon price. The buyer takes into account education, experience and willingness to accept certain work conditions (long hours, deadline pressures, etc.).

Compensation comparisons to national norms make no sense unless adjusted on an “apples to apples” basis. A successful trader who makes a million dollars is likely worth every penny. However, it would be insanity to continue paying people for a job not done well, especially when bad results are subsidized with federal dollars. Hiring and retaining effective workers is always a challenge, perhaps never more so than now. Widespread attention, focused on compensation standards, opens the door to improved practices. Those Wall Street professionals who refuse to budge may end up losing the very institutional clients that indirectly pay their bills.

Risk Management Adventures

Thanks to financial planner David Boczar for sending along a thought-provoking quote from famed commodities trader Ed Seykota. Described as someone who turned $5,000 into $15 million over a dozen years, this uber trend follower Seykota cautions: "Surrender to the reality that volatility exists, or volatility will introduce you to the reality that surrender exists."

As I've written many times, risk management is not the same thing as risk minimization. Risk is neither inherently "good" or "bad" but rather a reality, with potentially crushing economic impact if ignored or given short shrift. As we've seen in recent days, some attempts to tame the risk lion have resulted in serious casualties.

It is no surprise then that pundits and reporters are asking about the whereabouts of risk managers, part of the frenzied blame game afoot. (Is there a "Where's Waldo" equivalent here?) New York Times blogger Saul Hansell pressed a lot of hot buttons with his September 18, 2008 post entitled "How Wall Street Lied to Its Competitors." My response, now one of more than 100 posted responses, is shown below.

<< I concur with much of this article. Effective risk management is much more than quantitative analysis. Many individuals are lulled into false security when given a bunch of computer printouts, accepting numbers as gospel truth. Like the fictional Detective Columbo, decision-makers must search for “hidden” information, not reflected in computer printouts. I recently testified before the ERISA Advisory Council about “hard to value” assets. Click here to read my comments.

P.S. Some of the quants sat on boards of financial institutions. It would be helpful to know more about their role as relates to oversight of risk management activities. >>

To my last point (above), it should be noted that litigation risk could be a deterrent for prospective directors with risk management experience. For example, Ms. Leslie Rahl (who is quoted in Hansell's blog post about the perils of underestimating risk of complex mortgage backed-securities) is, according to the Financial Post, named in a lawsuit filed against Canadian Imperial Bank of Commerce (CIBC), along with others such as the former Chief Risk Officer and the current Chief Risk Officer. Journalist Jim Middlemiss quotes the bank as denying allegations and expressing confidence that their conduct was appropriate. (See "CIBC hit by suit over subprime lending," July 24, 2008.) Additionally Rahl, a former Citibank derivatives division head, is listed on the Fannie Mae website as a "Fannie Mae director since February 2004."

For interested readers who want to follow the mounting litigation related to sub-prime activities, check out attorney Kevin LaCroix's blog entitled The D&O Diary. Be forewarned that Kevin posts volumes about Director and Officer (D&O) liability. Should we be disturbed that he has so much news about which to write?

What does this mean for institutional shareholders? Run, don't walk, to the closest risk management analysts who can help you decipher whether a company is doing a "good" job of identifying, measuring and managing a panoply of financial and operational pain points. Send us an email if you want some help.

On the topic of models, my article entitled "Asset Valuation: Not a Trivial Pursuit" (FSA Times, The Institute of Internal Auditors, 2004) still rings true. Check out the 10 prescriptives discussed therein. (This is by no means an exhaustive list.)

  1. Gain an intuitive understanding of the model.
  2. Ask questions of the model builders.
  3. Determine whether or not a model meets regulatory requirements.
  4. Inquire whether or not different models are being used for tax reporting versus financial statement presentation.
  5. Understand the data issues.
  6. Ask about model access.
  7. Evaluate the asset portfolio mix.
  8. Ascertain the extent to which a model incorporates embedded derivatives.
  9. Determine the simulation approach used to value path-dependent securities.
  10. Enlist senior management to assign someone from the finance team to work closely with the auditing team.

Seal of Approval for Hedge Funds

In a recent interview, Mr. Stanley Goldstein announced the creation of an industry watchdog group, led by the New York Hedge Fund Roundtable. Its goal is to self-enforce otherwise voluntary and "weak" hedge fund practices. (As I wrote in "Doris Day, Scarlett O'Hara and Financial Market Tumult," July 19, 2008, a July 17, 2008 Financial Times editorial refers to such guidelines as cosmetic, meant to attract institutional investors and to keep regulators at bay.)

Goldstein, a CPA and founder of several hedge funds, explains that the aim is "not to start a separate organization but to use the existing one to compile and disseminate standards for hedge funds to follow," adding that "We do not see enforcement as practical or desirable but rather, hope that 'industry usage' will evolve along the lines which we, and others like us, deem appropriate."

Goldstein's support of the free market to act as the ultimate enforcer is laudable, especially at a time when global regulators are far from silent about the need for more stringent rules. Will Adam Smith's "invisible hand" really work? Let's hope so. As this blogger as written many times before, regulations no doubt change the way market participants behave, often leading to the "Law of Unintended Consequences."

Goldstein strongly believes in the power of collective self-policing. "By analogy, you will notice that more and more not-for-profit organizations are beginning to create audit committees on their boards and some have adopted "whistle blower" policies. There was no mandate nor promulgation forcing them to do this. What happened? Donors asked questions and boards had no choice but to make sure the right boxes could be checked off or risk losing contributions, the lifeblood of funding. These charities are run by smart people who are taking the hint. They want to be good players. With luck, time and some coordination, we can edge hedge funds in the same direction."

In the absence of a serious industry attempt to do better (for those funds who are not already at the top of their game), new accounting rules (FAS 157 or IAS 39 for example) and/or regulators' admonitions (such as the U.S. Department of Labor's recent letter to a plan sponsor, urging them to do their own valuation homework) could cause institutional investors to shy away from alternative investments such as hedge funds. If true that alternatives might help to diversify a portfolio, then a rejection due to a statutory artifice (versus an economic exigency) would be yet another example of the "Law of Unintended Consequences." (Read "Regulators Tell Pensions to Independently Value Positions," August 9, 2008, to access the aforementioned letter about valuation.)

This blogger says "bravo" and wishes the New York Hedge Fund Roundtable the best of luck. If Pension Governance, LLC can be of assistance, count us in. We agree that volitional "best practice" attempts are almost always far superior to a "one size fits all" authoritative mandate.

Editor's Notes:

  • According to economist Adam Smith in his Wealth of Nations, "Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." Click for more quotes by Adam Smith.
  • According to the Library of Economics and Liberty, the "Law of Unintended Consequences" states that "actions of people - and especially of government - always have effects that are unanticipated or 'unintended.'" The concept is related to Adam Smith's invisible hand theory wherein the famous economist wrote "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own self interest."
  • In aftermath of mandates such as FAS 133 (U.S. derivatives accounting standard) or FRS 17 (UK retirement benefit plan accounting standard), experts documented a clear change in the way impacted parties went about their business.
  • Interested readers can download "The Failings of FRS 17 and the Impact of Pensions on the UK Stock Market" by SEI researchers and Laurence Copeland (Cardiff Business School). The assertion is that, several years after its  2001 implementation, "the majority of UK pension schemes have closed to new entrants." In an attempt to promote transparency about retirement plans, the unintended effect is a diminution of aggregate employee benefits.
  • Another interesting publication is "The Impact of FAS 133 on the Risk Management Practices of End Users of Derivatives, "Association of Financial Professionals, September 2002. Researchers conclude that reduced hedging activity is likely due in part to the implementation of what users describe as an "excessive burden" in order to comply.
  • Regulators have called for more rules to govern non-profit boards, leading some to suggest that improvements are part "stick" as well as "carrot." For example, the Pension Protection Act of 2006 mandates enhanced disclosures and distribution limits for non-profits. Read "The Pension Protection Act of 2006 and Nonprofit Reforms" by Eileen Morgan Johnson, Whiteford, Taylor & Preston, LLP, January 2006. Also click to read "Nonprofit Governance In the United States" by Francie Ostrower, The Urban Institute, 2007. Click to access the Appendices to this paper.

Doris Day, Scarlett O'Hara and Financial Market Tumult

Remember the 1939 epic classic "Gone with the Wind" wherein Scarlett O'Hara protests serious conversation? Interrupted by news of an imminent Civil War, this party gal (with the famous 17-inch waist) complains. "Fiddle-dee-dee. War, war, war: this war talk's spoiling all the fun at every party this spring. I get so bored I could scream." 

As I read "Why No Outrage" by James Grant (Wall Street Journal, July 19, 2008), I wonder if this southern belle might now be heard to say "Loss, loss, loss: this loss talk is spoiling all the fun..." About structural reforms (a 2007-2008 equivalent of losing Tara, the family homestead), Scarlett might encourage delayed action. "After all...tomorrow is another day." Why fuss now?

Well, as we all know, Main Street and Wall Street are inextricably linked. Unlike Las Vegas, what happens in the financial markets,  does not "stay here." (Read "Slogan's run" by Newt Briggs, Las Vegas Mercury, April 8, 2004.) When huge losses roil capital markets (not just in the U.S. but around the world), real people can get hurt:

  • Employees lose jobs
  • Shareholders see their portfolios plummet in value
  • Pension plans that allocate big money to equities and bonds scramble to improve funding
  • Retirees who depend on the financial health of plan sponsors pinch their pennies further
  • Vendors who do business with financial institutions tighten their belts and/or layoff staff
  • Businesses, seeking to grow, borrow at higher rates, if they can borrow at all...

It is therefore a mystery to the editor of Grant's Interest Rate Observer that relatively few bad players are taken to task "in the wake of the 'greatest failure of ratings and risk management ever,' to quote the considered judgment of the mortgage-research department of UBS." Grant conjectures that high gas prices and an election-focused Congress may be to blame or that "old populists" have hoisted themselves by their own petard, having pushed for paper money, federal insurance subsidization of higher risks and government intervention with respect to credit decision-making. From the tone of this long, yet fascinating, commentary, Grant rants about big government at the same time that, ironically, big government seeks to become even bigger in the form of new financial market regulations.

For my two cents as an advocate of free markets (not faux capitalism as exists around the world), a return to the gold standard merits serious consideration. Improperly priced federal insurance of bank deposits and pension liabilities (and much more) induces adverse selection and moral hazard. Riskier organizations get subsidized by more prudent market participants and have little incentive (arguably no incentive) to get their risk management house in order. Regarding government intervention as to how credit is allocated, plenty of empirical studies quantify the economic "bad" that results from information asymmetry. When buyers and sellers are not fully informed, supply and demand cannot intersect at the"correct" price of money or the optimal level of borrowing/lending.

Then there is the shame factor. In an era of reality shows, can we expect honor and accountability? Grant has few kind words for market behemoths (current and now extinct) who watch(ed) the Titanic sink "under the studiously averted gaze of the Street's risk managers." Will today's villains of excess rise, Phoenix-like, as have infamous names of yore, now reincarnated as media superstars? (Nick Leeson of Baring's fame has his own website and earns a living as a consultant and speaker. Henry Blodget pens "Internet Outsider" and e-newsletter, Silicon Alley Insider - a fun read for this bloggerette.)

Related to Grant's provocative piece, a recent article about voluntary standards caught my eye with its suggestion that industry attempts may be more show than reality. In its "agenda-setting column on business and financial topics," the Financial Times' Lex states that such guidelines receive little scrutiny and are put in place as a way to attract risk-averse institutional investors and/or to avoid the harsh spotlight of global regulators. (See ""Funds of hedge funds," Financial Times, July 17, 2008.) An easy way to check is simply ask each hedge fund manager about his/her reliance on published guidelines. Inquire how traders are compensated. Are they encouraged to take pure risks or are they instead benchmarked on the basis of risk-adjusted returns (with "risk" referring to the holistic assessment of uncertainties)? Don't stop with hedge funds. Ask any service provider or trader about their controls and how they monitor the quality of their processes.

The creation of an effective reward system and "best practices" are favorite topics of this blog. Our team (Pension Governance, LLC) and fiduciary community colleagues decry the status quo that makes it difficult to reward good players, at the same time that questionable practices are frequently left untouched. Poor quality disclosure is just one factor that inhibits the design of a better mousetrap.

Two hours into this post, I'm going to conclude with the notion that "freedom is not free" (anonymous). To enjoy flexibility and regulatory latitude, people of great courage must buck the existing system and both demand and assume accountability. At a minimum, interested parties (retirees, shareholders, taxpayers) want to better understand what went wrong and how internal controls will be strengthened post-haste as a result of introspection. Leaders at troubled institutions do a great service by informing the public about corrective actions underway.

For pension fiduciaries, a critical lesson learned is this. If you are not already doing so, waste no time in getting an operational review. This extends to tough and detailed interviews with your external money managers and service providers about all things risk management. Communicating your process to plan participants (for all types of plans) and shareholders/taxpayers gets you brownie points and helps to raise the "best practices" bar. 

Doris Day's sentiment may be great for meditation class but has no place in a discussion about financial system reform and governance of individual organizations, plan sponsors included. "What will be, will be" is the wrong answer (though "Que Sera, Sera" is a favorite tune).

The power of one keeps us in awe. Who will step up to the podium and say - "The buck stops here?"

Please email us with examples of pension and financial service leaders whom you believe inspire and lead the way in terms of governance. Let us know if we may attribute your comments or should post them anonymously.

 Editor's Notes:

Pension Fiduciaries - Time to Wake Up and Smell the Coffee, Part One

Today's post and the next few that follow focus on pension governance (the name of our new website and a term that is often used to describe fiduciary duties and best practices). For a discussion of what pension governance means, click here to read interviews with market leaders. It's such an important topic yet often overlooked. In fact, the U.S. Department of Labor created an educational program ("Getting It Right") in order to help individuals understand their duties. (The results of countless audits apparently left examiners nervous about the folks who did not properly self-identify as fiduciaries.)

"Hot off the press" is a set of standards devoted to the topic of pension governance. Newly published by the Stanford Law School, the so-called Clapman report urges pension funds, endowments and charitable funds to adopt principles that reflect prudence, ethics and transparency. Citing some big dollar "no-no's" on the part of institutional decision-makers, chief architect of the report, Peter Clapman,and others rightly point out that giant institutions must walk the walk if they admonish corporations to do the same. CEO of Governance for Owners USA and former chief investment counsel of TIAA-CREF, Clapman adds that “Bad governance also weakens funds by eroding public support for them." One element of the report calls for funds to provide clear (and make public) information about governance rules.

Yippee Yahoo!

A few of us sometimes feel as if we've been screaming in the wind about the urgent need to know who is in charge and how they are running the show. (I'm sure Clapman and others would agree.) To read how bad things are in terms of NOT being able to easily identify where the buck stops, check out "In Search of Hidden Treasure." More than a year ago, I wrote "that a systematic identification of who does what and why with respect to employee benefits is simply not a reality as things stand today. This makes it difficult (perhaps impossible) to effect change."

The Clapman Report suggests that funds hire "trustees who are competent in financial and accounting matters." Read "Practice What You Preach" for our list of basic questions about pension fiduciary selection, training and performance evaluation. Anecdotally, I've often queried trustees and  other types of fiduciaries - "How do you become and stay a fiduciary? Do you take a quiz? Do you possess a certain amount of relevant experience? Do you get paid what you're worth in terms of liability exposure and hours spent on plan-related tasks?"

Scary to say, selection is frequently a function of who is seen as having a few hours of free time. Unfortunately, being a plan fiduciary is arguably a full-time job. Moreover, with so many complex decisions to make, someone with a limited background in topics such as investing may truly struggle to understand basics, let alone nuances of evaluating risk-adjusted return expectations. Even when an external consultant is used, a fiduciary still retains oversight responsibilities (a topic deserving of its own separate post).

Another proffered recommendation from the Clapman Report is to "establish clear reporting authority between trustees and staff" and to "define appropriate responsibilities and delegation of duties among fund trustees, staff, and outside consultants." We couldn't agree more. Check out our earlier discussion about the importance of incentives in "Paper Clip Theory of Pension Governance."

One thing is clear. Pension governance is starting to attract attention. That's great news for the many fiduciaries already doing things the right way. (You deserve recognition.) For those who need to improve, perhaps the spotlight on practices, good and bad, will encourage change. That would be a huge plus for plan beneficiaries, taxpayers and shareholders.

Here are a few resources for interested readers.

1. Committee on Fund Governance: Best Practice Principles -"Clapman Report" (Stanford University)

2. Prudent Practices for Investment Stewards (Fiduciary 360, AICPA, Reish Luftman Reicher & Cohen)

3. Asset Manager Code of Professional Conduct (CFA institute)

4. Standards of Membership and Affiliation (The National Association of Personal Financial Advisors)

5. CFP Certification Standards (Financial Planning Standards Board)

6. Regular Member Code of Ethics (National Investor Relations Institute)

7. Code of Professional Responsibility (Society of Financial Service Professionals)

8. Also check the site for the Financial Planning Association. I understand that they are soon to release a new set of standards for financial advisors.

The Case of the Mistaken Jellybean and Pension Food for Thought


When I was a little girl, the spring holidays were a big deal. My sister and I would spend hours in search of hidden jellybeans and chocolate eggs. My favorite flavor was licorice and, once found, I would indulge. One year, to my delight, I found what I thought was a black jellybean. Luckily, upon closer inspection, I realized it was a gift from the cat (and of course I threw it away).

So what's the moral of the story for plan sponsors?

Look closely and act wisely.  What looks like a bonus could be a nasty surprise in disguise.

More specifically, sponsors who only look at the positive impact of short-term market conditions on funding status, without addressing long-term structural issues, miss the mark. What looks like a favored treat (relief from having to do anything now as long as nominal numbers "look good") could turn out to be just the opposite (a situation left untouched until it's too late to take corrective action in a cost-effective manner).

An examination of the short-term versus long-term also begs the question. Should the funding of benefit plans be considered strategic or tactical? Those organizations that address risk management on an enterprise basis are starting to more fully incorporate the cost and design of benefit programs as part of their planning. Unfortunately, there is evidence that things remain in disrepair.

"Corporate Directors May Not Be Providing Sufficiently Robust Enterprise Risk Oversight," published by the Conference Board in conjunction with the McKinsey & Company and KPMG's Audit Committee Institute, states that "Corporate directors could find themselves exposed to liability if they fail to keep pace with evolving best practices in enterprise risk management (ERM)." The study also found that "While 71.8% of directors believe they have the right risk metrics and methodologies in making strategic decisions, 47.6% of directors would like to see more data analysis related to the company's risk profile." Click here to read our prior blog post about Enterprise Risk Management entitled "Enterprise Risk Management in the Boardroom."

Enjoy what April has to offer but don't get lulled into false security.

Fiduciary Pow Wow in San Diego

Creator of this pension blog, Dr. Susan M. Mangiero, CFA and Accredited Investment Fiduciary Analyst, joins a terrific roster of speakers at the FI 360 2007 Conference.

Being held in San Diego this year, the "Conference offers attendees the opportunity to learn from the foremost minds in the fiduciary world, gain knowledge and skills to better serve clients, and network with their peers. In addition, it offers the opportunity to participate in demonstrations and hands-on workshops for the Fiduciary Analytics tools."

Click here to read the FI 360 2007 Conference agenda.

Click here for more information about the Accredited Investment Fiduciary Analyst designation.

Risk Lessons from the Financial Services Industry

Regulation of financial service companies has long been a catalyst for pro-active risk management. Banks, for example, are obliged to address risk controls and measurement of risk as they ready themselves for Basel II compliance and related capital charge calculations. (The Bank for International Settlements describes the Basel II Framework as a "more comprehensive measure and minimum standard for capital adequacy that national supervisory authorities are now working to implement through domestic rule-making and adoption procedures.")

So results from a recent Deloitte survey of global financial institutions are surprising and a bit worrisome. Interviewing Chief Risk Officers at more than 130 global financial institutions, the "Accelerating Risk Management Practices" report finds that only 47 percent of respondents describe their institution as "extremely or very effective in managing risks associated with business continuity/information technology (IT) security, 43 percent each for operational and vendor risk, and 35 percent for geopolitical risk." This is in contrast to more than 70 percent who report good standing in the areas of market, credit and liquidity risk. The survey results also suggest a need for additional work in the area of credit products and commodity derivatives, including energy.

Noteworthy is the migration of risk issues to the board level, something we think makes sense for pension plans as well. While the Deloitte survey finds that 84 percent of reporting institutions have a Chief Risk Officer in place, little information is available about this role at plan sponsors. (The just released survey, co-sponsored by Pension Governance, LLC and the Society of Actuaries, asks about the existence and responsibilities of a Chief Risk Officer.)

Surveys like this are good reminders that a risk manager's work is never done!

Editor's Notes:

1. Click here to read the March 26, 2007 press release issued by Deloitte.

2. Click here to read an article about the job of Chief Risk Officer entitled "Life in Financial Risk Management: Shrinking Violets Need Not Apply" by Susan M. Mangiero

Pension Solutions

With all the talk about problems (and there are plenty of them), I think it's important to focus on solutions (and there are plenty of them too).

What pension problem would you most like to solve? Click here to email us with your input. Please let us know if we have permission to post your response and, if so, whether you want us to include your name. (We will post comments anonymously unless you tell us expressly we can use your name.)

Pension Problem Solving - Building the Team

In an effort to expand my horizons and better understand the dynamics of team-building, I recently spent several hours with an expert in PI. Also known as the Predictive Index, this self-described "unique, in-house management tool" is used to "effectively motivate, lead and leverage a person's strengths to achieve company goals." (Click here for more information.)

I started off as somewhat of a skeptic. (I am after all a Ph.D. in finance with a minor in math.) By the end of the meeting, I think I came away with a much better understanding of how I can improve my communication and leadership skills, something that no doubt is well worth the cost of time and money.

While each individual needs to seek counsel from behavioral experts as they deem appropriate, anything that enhances team-building may merit more than a peek. A wide variety of other tools include Myers Brigg, Raymond Cattell's 16 personality factors, Strong Interest Inventory and Johnson O'Connor aptitude analysis.

This topic is broad and well beyond the scope of any blog post. An interesting takeaway is the extent to which effective team-building can help pension decision-makers in 2007 and beyond. After all, how do we characterize the benefits situation in modern times? A few thoughts follow.

1. Responsibilities involve multiple departments such as Human Resources, Operations, Compliance, Treasury, Accounting and Investor Relations.

2. The need to contain costs while trying to attract, retain and motivate productive workers is often seen as mutually exclusive and is therefore a possible cause for intra-organizational friction.

3. Competing and often disparate compensation rewards for benefit plan decision-makers exist and vary across functions and titles.

4. Penalties for getting the benefits mix "wrong" vary across functions and titles.

5. There is an alarming increase in personal and professional fiduciary liability that could encourage a counter-productive "blame game" unless everyone understands and adheres to a unified set of goals.

Team-building is tough, especially for complex issues. While critics disparage assessment tools as "warm and fuzzy," the reality is that "we're all in this thing together" when it comes to benefit plan decision-making.

Behavioral science and the bottom line? Not such an odd couple after all.

Do We Need a Dr. Phil for Pensions?

Where is Dr. Phil when you need him? According to a recent pension study, courtesy of the Toronto-based Rotman International Centre for Pension Management, problems "range from poor practices in board member selection to organizational dysfunction such as the lack of delegation clarity between board and management responsibilities. Weak oversight functions also have led to difficulties in sorting out the competing financial interests of differing stakeholder groups and self-evaluation of board effectiveness continues to be the exception rather than the rule."

Okay, so maybe we won't be holding hands and singing Kumbaya any time soon. However, failure to recognize behavioral impediments is a recipe for disaster. Since many companies accept the importance of employee benefit plans as a means to attract and retain talent, yet wince at their cost, HR and Treasury must find a way to work together. This is especially true as new accounting rules take effect, motivating shareholders to examine financials in a new light.

Public funds don't get a free ride. Taxpayers are frustrated and unhappy. With GASB 45 about to give the word deficit new meaning, public plan executives are going to hear the howls of protest in city halls throughout the U.S.

Working across disciplines and functions is the new mantra in employee benefits land. Pension decision-makers will need to coalesce or risk doing an incomplete or poor job of navigating stormy waters. A possible result? Increased personal and professional liability, coupled with a host of nasty financial outcomes for plan sponsors.

This is no time to argue over turf!