Can A Retirement Plan Have Too Much Risk Management?

The issue of excess has been on my mind lately, mostly focused on my fragrance collection but now expanding to the topic of investment risk management. More specifically, as I continue to lead workshops about retirement plan risk management for the Professional Risk Managers' International Association ("PRMIA"), I am pondering whether too much of a so-called "good thing" makes sense. 

By way of background, friends and family know I am a perfume aficionado. Yes, the ubiquitous "free" gift with purchase is a plus but I do truly enjoy trying new scents. I'm not alone. According to a February 23, 2016 article on the Beauty Stat website, 2015 sales of "prestige beauty" products grew more than seven percent to $16 billion and "mass beauty" product sales climbed two percent to nearly $22 billion in the United States.

Colleagues know that I have spent several decades in the risk management industry with positions that include trading, compliance and expert testimony, depending on the year. I am the author of an entire book and dozens of articles about investment risk governance. I strongly believe in the importance of establishing an appropriate risk management protocol, following said policies and procedures and regularly reviewing whether risk management actions are effective or need to be tweaked. I likewise believe there are lots of retirement plans that should be doing much more when it comes to identifying, measuring, managing and monitoring relevant risks.

Coming back to this issue of "too much" risk management, the critical question is whether investment fiduciaries can be too cautious. Most reasonable people would likely say "yes." Regardless of plan design, if an investment portfolio is overly skewed to seemingly safe assets or funds of "safe" assets, expected return could be insufficient to meet long-term needs. A discussion about what constitutes "safe" assets is left for another day except to say that every investment has some risk. Even putting one's money under the bed could be risky if the house burns down. Another consideration is the cost of hedging. There is no free lunch. All fees and expenses associated with risk management, including the cost of putting a good technology system in place, should be part of any risk-adjusted performance assessment.

Retirement plan fiduciaries and their advisors are well served by identifying primary goals, major obstacles and both short-term and long-term nightmares that would generate serious pain for participants. Said differently, risk management, like perfume, is a good thing unless it prevents someone from achieving important milestones. As for me, I just bought a new bottle of perfume but resisted buying the other two I wanted. This should help me with my goals of decluttering and save more money.

How to Sell Investment Services

As I understand, the term "consultative selling" was first used by author and sales expert Mack Hanan. The concept is simple. Know what your customer needs and offer them solutions to their problems. The process is a two-way street. Both buyer and provider are actively involved and should communicate clearly and with respect. While lots of advisors and their firms find themselves on the A list, there is a continuing flurry of lawsuits being filed that allege self-dealing, opacity of disclosures and reasonableness of fees. Visit the 401k Help Center website section regarding court decisions and legal activity to read for yourself.

As with any industry, the investment community is constantly self-examining its practices in order to improve. This is a positive thing. As I point out in "Fake News, Plagiarism and Business Ethics," good players have a vested interest in self-policing since they can be tainted, reputation-wise, as the result of bad actions of others. I've spoken to hundreds of buyers of financial services who question the checks and balances of those who manage their money or otherwise influence their retirement planning decisions. Frequent and clear communications with their respective advisor, consultant or portfolio executive can go a long way in assuring the doubting Thomas. There is no shortage of inspiration about how to effectively interact.

Over the holidays, I observed a back and forth between sellers and buyers at a national jewelry store. While waiting my turn, I watched shop clerks attend to customers who seemed thoroughly prepared with questions about quality and price. I'm not a big purveyor of charms but was certainly impressed with the breadth of knowledge on both sides of the cash register. I can relate. As my friends know, I have a penchant for perfume and like to treat myself to a new scent now and then. I do my research in advance, visiting sites like Wine connoisseurs are similarly motivated to gather information and sellers are wise to help educate them.

Whenever the product or service is personal, sellers must respond accordingly. Empower potential or existing customers with straightforward information. Be prepared to answer questions. Treat each client with respect as if they really count. For some organizations, the cost of selling could be too high unless the transaction is "large enough." Size is a perfectly fine business model to adapt but make it known in a courteous way that minimums apply. A small investor today could be your large investor tomorrow.

Most selling involves humans and that means that behaviors can't be ignored. Before he passed away, famed sales guru Zig Ziglar said "You can have everything in life you want, if you will just help enough other people get what they want."

Five Retirement Fiduciary Events That Made a Big Difference in 2016

Kudos to Chris Carosa for his continued efforts as publisher of Fiduciary News. I share his mission to educate and provide independent insights. That is why I was delighted to be one of the contributors to his recent article, "These Five Developments Dramatically Changed the Retirement Fiduciary World in 2016."

My view is that it is hard to pinpoint standalone issues. So many areas overlap. For example, a discussion about fiduciary litigation frequently involves questions about the reasonableness of fees. A conversation about fees often means talking about asset allocation as well. An analysis of asset allocation trends is commonly linked to investment performance realizations. When one talks about returns, it is usually in the context of economic forecasts. Overlay regulatory mandates, including the imminent U.S. Department of Labor Fiduciary Rule, and it becomes apparent that retirement plan governance is complex territory. Nevertheless, Chris did a noble job of listing significant and distinct trends with his readers. His list includes the following:

  • Capital Markets - Low interest rates continue to challenge both institutional and individual investors. The pension risk transfer market is experiencing unprecedented growth as sponsors seek to focus less on retirement plan management and more on operating their core businesses. Post-election, the U.S. market seems poised for better returns in 2017 although it is thought that low-cost index funds will remain popular.
  • Excessive Fee Litigation - The attention paid to fee levels and the process of assessing reasonableness continues to grow. Some believe that the proliferation of lawsuits has resulted in improved governance regarding the selection and review of various funds. I am quoted as saying that "...investors in search of turbo-charged performance struggled with the reality that the costs of alternatives, derivatives and structured products are generally higher than passive funds."
  • Fiduciary Rule - Uncertainty is the watchword with multiple plan sponsors unsure about what they might want to delegate to a third party. Consulting firms that offer independent fiduciary services have an opportunity to help their clients solve real compliance problems.
  • State Sponsored Private Employee Retirement Plans - Deemed controversial by some, these arrangements to help small business employees are being rolled out by states throughout the nation. The goal is to encourage savings over the long-term although I have doubts about accountability and redress for disgruntled participants. Click to read "State Retirement Arrangements for Small Business Employees" (June 9, 2016) and "Public-Private Retirement Plans and Possible Fiduciary Gaps" (June 5, 2016).
  • Presidential Race - Carosa writes "Of all the events of 2016, nothing will have had more of an impact than the presidential election." Perhaps he is correct. Already the yearend markets have been chugging upward and optimism is on the rise. Yet there are questions about whether regulations such as the Fiduciary Rule will be weakened or perhaps eliminated altogether. Should that occur, financial service industry executives will need to respond.

The article lists other developments including restructuring deals. I am quoted as saying "Restructuring deals have made 2016 a notable year in terms of the number of pension risk transfers and the outsourcing of the responsibilities of a Chief Investment Officer to a third party. Bankruptcy has catalyzed the restructuring of multiple plans, much to the dismay of the savers who have been asked to accept lower benefits. Service providers who have been ordered by the courts to take less favorable terms as swap counterparties or consultants are correspondingly glum."

President John F. Kennedy declared "Change is the law of life. And those who look only to the past or present are certain to miss the future." I concur. Where there is disruption, there is always the opportunity to address a problem and win the hearts and wallets of investors.

Here's to a terrific 2017. Happy holidays!

Hard to Value Assets, Hedge Funds and Investment Fiduciaries

As I have pointed out on multiple occasions, valuation is an integral part of investment risk management for several reasons. First, fees paid to asset managers are frequently linked to performance and performance calculations depend on reported values. If values are artificially inflated, returns are likely to be inflated as well. Second, imprecise values can skew asset allocation decisions, lead to hedges being too big (or too small) and possibly cause an investor to breach trading limits that are part of an Investment Policy Statement. It's no surprise then that valuation process questions about who does what, when and how continue to surface.

According to a May 9 Wall Street Journal article, the U.S. Securities and Exchange Commission ("SEC") is investigating "the way hedge funds value their thinly traded holdings and how they respond when investors ask for their money back." The SEC has been vocal about its concerns regarding asset valuations for awhile. In December 2012, Bruce Karpati, then Chief of the Asset Management Unit of the SEC Enforcement Division (and now in private industry), talked about a focus "on detecting fraudulent or weak valuation practices - including lax valuation committees and the use of side pockets to conceal losing illiquid positions - and the failure to follow a fund's stated valuation procedures." Click to read "Enforcement Priorities in the Alternative Space." (As an aside, some hedge funds buy and sell actively traded securities for which there is a ready market and full price transparency.)

The U.S. Department of Labor ("DOL") regularly broadcasts its concerns about "hard to value" assets, including financially engineered products that show up in certain defined benefit and defined contribution retirement plans. In September of 2008, I spoke before the ERISA Advisory Council, by invitation, to address valuation issues from the perspective of a trained appraiser and fiduciary best practices expert. Click to read "Testimonial Remarks Presented by Dr. Susan Mangiero." I talked at length about valuation questions to ask of service providers and procedural prudence considerations for institutional investors.

A few weeks ago, senior attorney Fred Reish addressed monitoring and uncertainty in his April 19, 2016 newsletter. He directed readers to Fiduciary Rule preamble text that urges an advisor and his financial institution to install an adequate monitoring process before recommending "investments that possess unusual complexity and risk, and that are likely to require further guidance to protect the investor's interests." Click to read "Interesting Angles on the DOL's Fiduciary Rule #1." It doesn't take a rocket scientist to conclude that a "complex" and "risky" investment could be hard to value and not particularly liquid. (I have purposely not defined the terms in quotes herein as they are often related to facts and circumstances for a particular investor.)

Expect to read more about this important topic of valuation, especially as applied to those investors in search of higher returns. In a "no free lunch" world, risk and return go hand in hand. It's not necessarily a bad thing to take on greater risk as long as there is an understanding at the outset as to what gives rise to uncertainty and how risks are being mitigated.

Financial Technology and the Fiduciary Rule

Whether the proposed U.S. Department of Labor so-called fiduciary rule becomes law this year remains to be seen. Many in the industry think its passage is nigh. Critics hope for a reprieve, asserting that costs are likely to outweigh benefits.

One oft-repeated concern is that small savers will be harmed if financial service companies decide to jettison accounts that fall below target asset levels. The Securities Industry and Financial Markets Association ("SIFMA") explains "Because they cannot afford a fiduciary investment advisory fee, they will instead be forced to solely rely on a computer algorithm known as a 'robo-advisor.'"

Financial technology enthusiasts will counter that a more automated approach to retirement planning is a good thing for big and small savers alike. Certainly the topic merits review for at least two reasons.

  • The use of machines has exploded in recent years. In her November 9, 2015 speech about technology, innovation and competition, U.S. Securities and Exchange ("SEC") Commissioner Kara Stein foretells buoyant growth with an expected $2 trillion in assets under management by robotized advisors by 2020.
  • There are central questions about the fiduciary obligations of a company that concentrates on algorithmic advising and money management. Besides seeking to contain model risk, there is a need, at a minimum, for a vendor to regularly review client objectives and constraints. Click here to access a white paper on this topic by National Regulatory Services.

A few weeks ago, a handful of venture capitalists and prominent angels announced a $3.5 million capital round for a financial technology company called Captain401. Its stated goal is to help small businesses streamline the creation and administration of 401(k) plans that the founders argue would be too expensive to offer without automation. A cursory review of the company website makes it impossible to know much about its business model, technology safeguards or compliance infrastructure. Nevertheless, the funding of this and other "Fin Tech" organizations augurs favorably for added growth in this area.

As the global retirement marketplace adapts to regulatory and economic realities, it will be interesting to watch (or perhaps lead) what unfolds in terms of innovation, service provider competitiveness, cost tiers and other outcomes that impact savers and those who have already retired.

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.

Espresso Math and Retirement Plan Fees

Year 2016 promises to continue the inspection of fees charged to retirement plan sponsors and participants, in part because it is such an important topic. Also there is considerable litigation in this area that appears unlikely to abate any time soon. According to Groom Law Group, "Nearly forty lawsuits have been commenced relating to 401(k) plan fees." Court documents reveal that other lawsuits focus on fees paid by government pension plans and ERISA defined benefit plans, respectively. Earlier this year, it was reported that litigation risk is a key concern of defined contribution plan executives. In the public sector, a confluence of political pressures, funding deficits and cash squeezes are forcing fees and transparency to the top of the list for trustees. I wrote about the case of Rhode Island a few months ago. Missouri, New Jersey, New York and Ohio promise to rally the fee flag.

I will be addressing the topics of fees and investment risk assessment with co-speakers on January 13, 2016 as part of "Life After Tibble: Investment Monitoring and Litigation Defense Considerations for ERISA Fiduciaries" and again on January 27, 2016 as part of "ERISA Plan Investment Committee Governance: Avoiding Breach of Fiduciary Duty Claims."

What is less clear for the New Year is whether fee disclosures by various plan sponsors will be similar enough in nature to compare and contrast. When reporting standards vary across organizations, the result can be a confusing melange of numbers that cost a lot to put together but don't help the user. Besides ambiguity, unexplained price bounces can be likewise hard to grasp.

On a more quotidian level than the heady universe of retirement plans, I recently learned that fuzzy price math can pop up from time to time. I stayed at a hotel that offered complimentary breakfast except for my daily double espresso. That would be extra. What I soon discovered was that the pricing varied by day and who came to my table. One morning, the bill showed $5. The next time, the server whispered that he would not charge me. On the third day, I ordered a triple and was asked to pay $12. When I queried for an explanation, he shrugged his shoulders and blamed his boss. I could understand something in the neighborhood of $5 to $7.50 but $12 made no sense. I could have ordered two double shots at $10 and poured half of one cup out. When told that his manager was in a meeting, the waiter simply changed the bill to $8. I acquiesced and left for my appointment. On the last day, a new server comped the Italian drink. I left puzzled and bemused but no more wiser about how the prices were set, by whom and on what basis.

The moral of the story is that one does not always know how much he or she will be charged for something. This can be frustrating and make it hard to budget.

For the plan sponsors that do a terrific job in vetting fees and communicating this information to participants, keep up the great work. For those in need of improvement, there's no time like the present to get started.

ERISA Litigation and Investment Monitoring

Please save the date for an educational program entitled "Life After Tibble: Investment Monitoring and Litigation Defense Considerations for ERISA Fiduciaries." Produced by Bloomberg BNA, this webinar event will take place on December 3, 2015. Speakers are listed below:

  • James O. Fleckner, Esquire - Chair - ERISA Litigation, Goodwin Procter LLP;
  • Dr. D. Lee Heavner - Managing Principal, Analysis Group, Inc.; and
  • Dr. Susan Mangiero - Managing Director, Fiduciary Leadership, LLC.

In the aftermath of the U.S. Supreme Court "Tibble" decision, there are numerous questions as to what exactly comprises effective investment monitoring from a procedural prudence perspective. Given the newness of this important legal decision and little formal guidance from the High Court, the panel will present economic perspectives about what ERISA fiduciaries should do to assess, and possibly improve, their current investment monitoring process. Attention will be paid to related topics that include the delegation of investment monitoring to third parties (such as advisors, asset managers and consultants) and the kinds of information that should be communicated to plan participants about investment monitoring activities. The role of the economic expert and the factors that need to be considered in estimating damages will be addressed, along with a discussion of available industry resources. The panel will use examples from casework to illustrate some of the key points.

Further details will be posted shortly.

ERISA Litigation Predicted To Rise

I have just returned from Chicago where I spent two days listening to transaction attorneys, litigators and insurance company executives talk about trends in ERISA enforcement and legal disputes. Sponsored by the American Conference Institute, this assembly about ERISA litigation included sessions on class actions, Employer Stock Ownership Plan ("ESOP") problem areas, the role of economic experts in litigation, challenges to the church plan exemption, questions about excessive fees, de-risking, stock drop defense strategies, health care reform, how much ERISA fiduciary liability insurance to purchase and much more.

I took a lot of notes and intend to write about implications for plan sponsors and their service providers through an economic and governance lens.

It may be coincidental but certainly not trivial that the United States Department of Labor released its fiduciary proposed rule about conflicts of interest on the second day of this important ERISA litigation convening, i.e. on April 14, 2015. The thinking is that the adoption of a more rigorous rule could open the door wide to a multitude of further disputes and heightened examinations. Click here to access the language of the proposed rule and supporting documents.

It sounds like many will be even busier in the coming months.

ERISA Litigation Costs

After having just blogged about the April 13-14, 2015 American Conference Institute program about ERISA litigation in Chicago, it was somewhat coincidental that an article on the same topic crossed my desk today, painting a grim picture of what could happen to a plan sponsor in the event of a lawsuit.

While only two pages long, "An Ounce of Prevention: Top Ten Reasons to Have an ERISA Litigator on Speed Dial" invites readers to consider the advantages of staying abreast of increasingly complex rules and regulations as part of a holistic prescription for mitigating legal risk. Authors Nancy Ross and Brian Netter (both partners with Mayer Brown) cite "heightened interest" in ERISA by U.S. Supreme Court justices, a rise in U.S. Department of Labor enforcement and court decisions about the importance of having a prudent process. They add that de-risking compliance, disclosure requirements, conflicts of interest, large settlements and attorney-client privilege restrictions are other potential landmines for a public or private company that offers retirement benefits.

Elsewhere, Employee Benefit Adviser contributor, Paula Aven Gladych, predicts that the U.S. Supreme Court review of Tibble v. Edison International ("Tibble") could increase ERISA litigation risk for plan sponsors, regardless of its decision. In "Edison decision could be 'slippery slope' for plan fiduciaries" (February 26, 2015), she writes that "the court focused its attention on duty to monitor fees and investments, generally by investment committees and plan administrators of 401(k) plans." Interested readers can download the February 24 2015 Tibble hearing transcript.

Recent events reflect multi-million dollar resolutions, even when an ERISA litigation defendant feels strongly that it is in the right. In "Settlements offer lessons in breach suits" (Pensions & Investments, February 23, 2015), Robert Steyer reports that publicly available documents can shed light about what types of disputes are being settled, the dollar amounts involved and any non-monetary requests made by the plaintiffs. Competitive bidding as part of selecting a vendor is one example. He goes on to say that regulatory opinions are thought to be particularly helpful when they are viewed by the retirement industry as de facto guidance.

I will report back after attending the ERISA litigation conference in a few weeks although I suspect that judges, litigators and corporate counsel who speak will convey a similar message with respect to fiduciary scrutiny. As Bob Dylan sang, "the times they are a-changing."

U.S. Supreme Court and Tibble v Edison International

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

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

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

401(k) Fee Letter to Trustees

If you were one of the "lucky" ones, you may have noticed a new item in your mailbox. According to Wall Street Journal reporter Kelly Greene, a letter about 401(k) fees has been sent to roughly 6,000 companies. The author, Ian Ayres, is a law professor at Yale University. The message is that some companies are paying too much in fees and that offenders can expect to see their name in lights. In "Letters About 401(k) Plan Costs Stir Tempest" (July 24, 2013), Greene writes that critics have pounced on the age of the data used to determine whether monies paid to service providers are "too much" or "just right." Certainly stale inputs or numbers that are overly broad could lead to accusations of a Goldilocks porridge test instead of a rigorous assessment of costs. Since the final paper is not yet published, it is impossible to gauge details of the rigor applied in assessing fee levels.

What is particularly interesting to me is that various articles about the letter have generated large numbers of comments with no apparent consensus about the helpfulness of the forthcoming study. (The study is said to have extracted data from federal regulatory filings.) Some readers say "bravo" to a topic that demands attention. Others say "not so fast" unless you incorporate an assessment of fund performance, identify what services are being offered and review the quality of vendor support.

Several senior ERISA attorneys have been quick to comment, perhaps because 401(k) fee litigation is still a reality for more than a few sponsors. In "Much ado about nothing...or is it?" (July 18, 2013) Nixon Peabody lawyers Jo Ann Butler and Eric Paley point out that even the U.S. Government Accountability Office ("GAO") document entitled "401(K) Plans: Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees" (April 2012) addressed limitations of the Form 5500. Attorneys Butler and Paley add that high fees do not necessarily constitute a fiduciary breach and that "ERISA does not require a plan to offer the lowest cost investments available, nor that they even fall within a particular range." Instead, decision-makers with fiduciary responsibilities must select investments "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." When I asked Attorney Paley for a comment about what he deemed the key take away point, he replied that the letter may "upset the plan sponsor community, though it remains to be seen whether Ayres' study will serve as a catalyst to more expansive plan fee litigation."

Advocates point out that any heightened transparency about 401(k) fees that participants pay is a good thing. In "A Professor Puts the Scare in Plan Sponsors" (July 22, 2013), John Rekenthaler describes "annoyances" as part of the deal. A Vice President with Morningstar, he adds that "The 401(k) plan has given fund companies nearly $3 trillion in incremental assets -- $15 billion in annual revenues..." and "permitted corporations to shed the burden of guaranteeing pensions." He states that "Those benefits for fund companies and plan sponsors don't come for nothing. They come with a spotlight."

What should be a point of universal agreement is that facts and circumstances must be considered in evaluating the prudence of any fee arrangements and the related monitoring of service providers.

Tibble v. Edison and ERISA Fiduciary Breach Issues

Speedy and insightful as always, ERISA attorney Stephen Rosenberg has commenced a series of blog posts that describes his view of the "hot off the press" conclusions made by the United States Court of Appeals for the Ninth Circuit in Tibble v. Edison. Click to access the March 21, 2013 Tibble v. Edison opinion. This ruling will no doubt receive much attention in the coming days as jurists and ERISA fiduciaries digest its content. Some will view this adjudication as yet another reminder that prudent process must be undertaken and can be demonstrated with respect to a host of issues (although the outcome is mixed in terms of plaintiff versus defendant "wins"). Issues include the selection of investment choices and the fees paid accordingly. Click to access the amicus brief filed by the U.S. Department of Labor in support of the plaintiffs.

In his first post about yesterday's opinion, Attorney Rosenberg points out that the timeline that determines ERISA's six-year statute of limitations was deemed to have started "when a fiduciary breach is committed by choosing and including a particular imprudent plan investment" and did not continue by virtue of the investment mix remaining in the plan. He further asserts that defendants will want the clock to begin on the day an investment option is first introduced and that "any breach of fiduciary duty claims involving that investment that are filed later than six years after that date are untimely."

I will leave court commentary to the legal experts. Click to access the Boston ERISA & Insurance Litigation Blog for his analysis about this case and many more.

SEC and Revenue Sharing Enforcement

According to its September 6, 2012 press release, the U.S. Securities and Exchange Commission ("SEC") settled with two Portland, Oregon investment advisory firms for $1.1 million. At issue was whether investors were harmed due to the allegedly hidden revenue-sharing arrangements in place that may have resulted in a less than neutral basis for recommending certain funds. Neither party admitted or denied the regulator's charges. See "SEC Charges Oregon-Based Investment Adviser for Failing to Disclose Revenue Sharing Payments," September 6, 2012.

The issue of revenue sharing is unlikely to go away, especially with multiple regulators paying close attention now. The SEC had said that it plans to ask more questions about the independence, or lack thereof, that characterizes the relationship between professionals who give advice and the brokers and/or asset managers they use. Mr. Marc J. Fagel, Director of the SEC's San Francisco Regional Office, states that there will be a continued focus on "enforcement and examination efforts" related to "uncovering arrangements where advisers receive undisclosed compensation and conceal conflicts of interest from investors."

 The U.S. Department of Labor ("DOL") is likewise investigating whether revenue-sharing arrangements are being adequately disclosed. A few months ago, DOL settled with Morgan Keegan and Co. According to published accounts, monies will be returned to nearly a dozen pension plans by Morgan Keegan for having received a fee in exchange for recommendations it made about hedge fund vehicles. Morgan Keegan will also need to disclose whether it is acting as an ERISA fiduciary. See "Morgan Keegan settles with DOL over revenue-sharing accusations" by Darla Mercado (Investment News, April 16, 2012). 

Given recent court activity, more will be said later on by this blogger about when the practice of revenue-sharing could make sense and when there could be problems.

Pension Limited Partners and Private Equity Fees

News about private equity scions has dominated the headlines during this almost home stretch of the 2012 U.S. presidential campaign but other reasons abound as to why we should pay attention to this $2.5 trillion market, not the least of which is a continued allocation to this asset class by plan sponsors.

According to "Top 200 pension funds still carrying torch for alternatives," Pensions & Investments writer Arleen Jacobius (February 6, 2012) describes a 16% increase to $313 billion for the year ending September 30 or about three times the commitment to hedge funds for the same time period. Seeking diversification and higher returns are common explanations for the attraction.

The flip side is that private equity funds want pension money. In "Private equity courts pension funds for M&A finance," Reuters' Simon Meads writes that "private equity firms in Europe are sounding out yield-hungry" institutional investors as an alternative to "hard-pressed banks."

Pensions, endowments and foundations are getting the message that they may be in the cat bird seat in terms of power and the ability to negotiate on their terms (assuming that they are not creating an in-house private equity bench or partnering with industry giants as co-investors to source deals). In "Private equity LPs draw favorable deals from GPs" (The Deal, July 12, 2012), Vyvyan Tenorio writes that the current supply-demand relationship is allowing institutional investors to enjoy a bigger slice of transaction fees charged to portfolio companies when they exit. Pensions may receive a break on management fees too, depending on the willingness of market leaders to budge for large check-writers, many of which are asking that a separately managed account be established.

Besides the tug of war between general partners and limited partners over fees, the institutional presence is being felt in discussions about compliance and best practices.

Foley & Lardner LLP attorneys Roger A. Lane and Courtney Worcester cite valuation methodologies and the use of debt to finance deals as two areas that keep "Private Equity In The Crosshairs" (, July 11, 2012). Referencing several current lawsuits to illustrate each issue, they write that private equity funds are likely to face "certain specific legal hurdles and challenges" in the near future.

Law professor Steven Davidoff and New York Times contributor adds that limited and costly credit, slower fund-raising, a decline in returns and more expensive transactions are some of the reasons that small and medium players are heading for the hills. Even investing outside the United States could be a problem if local economies slow down and/or finding a partner is difficult and expensive. According to "For Private Equity, Fewer Deals in Leaner Times" (Deal Book, New York Times, May 29, 2012), Davidoff adds that industry consolidation will continue, activist deals may become more popular (when they offer more bang for the buck) and pursuing targets will require aggressive attention.

All in all, the prognosis for the private equity industry reflects structural changes in the global markets and the relationship between investors like pension plans and their general partners.

ERISA Litigation Against Service Providers

Seyfarth Shaw ERISA attorneys Ian Morrison and Violet Borowski wrote an interesting blog post about what they describe as a discernible growth in lawsuits "filed by (or on behalf of) ERISA plans (sometimes class actions) against investment providers for charging excessive fees or otherwise gleaning improper profits from investments used in ERISA plans."

What they point out as noteworthy is the fact that the plans' fiduciaries frequently have no involvement in filing a complaint against a service provider(s) since several courts have allowed plan participants to seek redress without getting permission or even having an obligation to inform a company sponsor. 

At first blush, they offer that this situation may seem benign and possibly even helpful to a sponsor if the result of litigation against a service provider(s) results in reduced costs for everyone. The plot thickens however if a participant's complaint and related discovery later leads to legal scrutiny of a plan's fiduciaries, alleging that they knew about problems but did little or nothing to rectify a "bad" situation.

Attorneys Morrison and Borowski point out the challenges that fiduciaries must confront when a participant(s) files a lawsuit.

  • "Do they join with the service provider on the theory that a common defense is the best defense?
  • Should they join the participant plaintiffs in attacking the provider and at the same time potentially implicating themselves?
  • Or, should they remain on the sidelines, potentially risking being sued for taking no post-litigation action to recover for the provider's alleged breach?"

According to "Wait, You Mean My Plan Is A Plaintiff?" (May 24, 2012), attorneys Morrison and Borowski suggest that plan sponsors set up Google alerts to track any lawsuits that involve a company's benefit plan(s).

As an expert who has been involved in service provider cases, Dr. Susan Mangiero adds that a good offense is to conduct a comprehensive review of agreements on a regular basis. Should litigation occur and an expert is engaged, that person(s) will likely have to review whatever communications were provided to plan participants during the relevant time period as well as the contracts between the plan sponsor and a vendor(s). Another prescriptive course of action is to ensure that communications are robust, especially now with new fee disclosure rules in place.

New Focus of ERISA Fee Litigation

According to Troutman Sanders ERISA attorneys Jonathan A. Kenter and Gail H. Cutler, the outcome of a recent 401(k) plan lawsuit known as Tussey v. ABB did more than force the sponsor to write a check for $37 million. It led to lessons learned about the need to regularly review record-keeping and investment management fees, negotiate for rebates if possible and adhere to documented investment guidelines. What it did not resolve was "whether the record keeping costs of a 401(k) plan may be borne exclusively by those participants whose investment funds enjoy revenue sharing...while participants whose accounts are invested in investment funds with no revenue sharing pay little or nothing."

In "The Next Frontier in Fiduciary Oversight Litigation?" (April 27, 2012) they suggest that courts will likely be asked to opine as to whether ERISA fiduciaries have justified prevailing revenue sharing arrangements, taking allocation and class-based fee levels into account. Their recommendation is to decide on a disciplined approach that makes sense rather than making arbitrary decisions. Allocation rules to consider include the following:

  • Apportion record keeping fees on a pro-rata basis so that each participant is only charged his or her "fair share." Credit any revenue sharing received back to the "funds or participants as part of a periodic expense balance true-up."
  • Levy the same record keeping fee for each participant. Allocate revenue sharing monies ratably "to all investment funds or participants."
  • Adopt a combined pro-rata and per capital allocation such that a record keeping fee would consist of a fixed amount and a variable amount. Imposing a cap on total fees could be included.
  • "Hard wire the allocation method in the plan document" so that how record keeping fees are charged becomes a settlor function versus a fiduciary task.

In 2007, the ERISA Advisory Council's Working Group on Fiduciary Responsibilities and Revenue Sharing Practices reviewed industry practices as a way to improve disclosure for 401(k) plan participants. One recommendation made to the U.S. Department of Labor thereafter was to categorize payments for certain professional services as settlor functions and thereby protect fiduciaries from allegations of breach. Another request was for clarification that revenue sharing is not a plan asset "unless and until it is credited to the plan in accordance with the documents governing the revenue sharing."

With ERISA Rule 408(b)(2) fee disclosure compliance just ahead, numerous questions remain. This had led litigators and transaction attorneys alike to comment that further lawsuits and enforcement actions are likely to follow.

Note: Interested persons can read "Final Regulation Relating to Service Provider Disclosures Under Section 408(b)(2)," published the U.S. Department of Labor in February 2012.

Pension Advisors: A Percentage of What?

I visited a local department store tonight after work. In search of new rain boots, I ended up buying a navy blue jacket but that's another story for another day. What irked me and ended up costing me time was ignorance on the part of the sales lady about simple math and the amount to which the markdown percentage should be applied.

Here is what happened.

The jacket was originally priced at $150 but marked down by 40 percent - good designer but last season's color. A sign atop the rack said that another 25 percent would be deducted from the ticketed price. A quick calculation on my part led me to believe that a $90 jacket would be sold at $67.50. Instead the woman behind the register insisted that the price of $90 was final and that it reflected a 25 mark down from the original price of $150. As hard as I tried, I could not convince her that $90 differed from 75 percent of $150. Finally, out of sheer frustration I am sure, she referred me to the manager and abruptly left her station. When I checked out, my receipt reflected a 25 percent discount from $90.

Walking home from my mini shopping spree, I wondered about the state of math education in this locale and why a simple calculation did not resonate. Worse yet, this lady was supposed to know better. It would be one thing to say "I don't know" but it is quite another thing to insist on being right when she was obviously wrong.

In the world of investing, it is arguably even more important to get expert advice. Instead of a few dollars at stake, inexperienced and/or ill-informed financial intermediaries could put $17.1 trillion in U.S. retirement industry assets at serious risk. In addition, countless financial advisers are retiring alongside their clients with worries that inexperienced persons will take their place. This could be troublesome since most experts predict that the complexities of a retirement crisis are unlikely to go away anytime soon.

According to "A talent shortage loom as the industry booms" by Jeffrey Schoeff , Jr.(Investment News, April 28, 2012), individuals in need of help may end up spending lots of time on a search for experienced and knowledgeable advisers who likewise have the patience to educate clients and recommend an appropriate long-term investment strategy as a result of getting to know needs, risk tolerance levels and constraints.

At the institutional level, staff budgets are being cut at the same time that certain investment strategies require careful diligence as relates to the use of leverage and a financial engineering component. One answer is to outsource to an independent fiduciary and/or external consultant or advisor. Interestingly, numerous firms have the budget to hire contractors but don't have the approval to hire a full-time person(s) even when salary and benefits could cost less than what a consultant or advisor will charge.

Good service provider due diligence is critical at any time but certainly if a plan sponsor is relying mostly on the capabilities of others, they need to feel confident that their advisors and consultants have a good handle on critical issues and potential solutions. Competency can help to save time and money and reduce stress. The converse is true too. Incompetency can cost an organization time and money and widen any funding gap. Either way, the role of the independent third party is expected to soar.

While robust due diligence takes time, it can help to stave off unwanted inquiries into the nature of risk-taking. Working with someone who is knowledgeable, earnest and dedicated to delivering requisite help should be seen as a big plus.

ERISA Pension Plans: Due Diligence for Hedge Funds and Private Equity Funds


Join me on May 1, 2012 for a timely and interesting program about alternative investment fund due diligence and other considerations for ERISA plan sponsors, their counsel and consultants. Click here for more information.

This CLE webinar will provide ERISA and asset management counsel with a review of effective due diligence practices by institutional investors. Best practices will be offered to mitigate government scrutiny and suits by plan participants.


With the DOL's and SEC's new disclosure rules and heightened concerns about compliance and valuation, corporate pension plans that invest in alternatives must focus on properly vetting asset managers more than ever before or risk being sued for poor governance and excessive risk-taking.

The urgencies are real. The use of private funds by asset managers is crucial for 401(k) and defined benefit plan decision makers. Understanding the obligations of private funds is essential to any retirement funds with limited partnership interests.

In addition, suits and enforcement actions against asset managers make it incumbent on counsel to hedge fund and private equity fund managers to fully grasp and advise on full compliance with the duties of ERISA fiduciaries to plan participants.

Listen as our ERISA-experienced panel provides a guide to the legal and investment landmines that can destroy portfolio values and expose institutional investors and fund managers to liability risks. The panel will outline best practices for implementing effective due diligence procedures.


  • ERISA fiduciary duties for institutional investors
    1. Hedge funds and private equity funds compared to traditional investments
  • Regulatory developments
    1. Disclosure
    2. Compliance
    3. Valuation
  • Developments in private litigation involving pension plan fiduciaries and alternative fund managers
  • Best practices for developing due diligence plans



The panel will review these and other key questions:

Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.

  • Regulatory developments
    1. Disclosure
    2. Compliance
    3. Valuation
  • Developments in private litigation involving pension plan fiduciaries and alternative fund managers
  • Best practices for developing due diligence plans
  • What are the regulatory concerns for ERISA pension plans that allocate assets to hedge funds and private equity funds?
  • What are the potential consequences for service providers that fail to comply with new fee, valuation and service provider due diligence regulations?
  • What can counsel to pension plans and asset managers learn from recent private fund suits relating to collateral, risk-taking, pricing, insider trading and much more?
  • How should ERISA plans and asset managers prepare to comply with expanded fiduciary standards?


Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.


Susan Mangiero, Managing Director
FTI Consulting, New York

She has provided testimony before the ERISA Advisory Council, the OECD and the International Organization of Pension Supervisors as well as offered expert testimony and behind-the-scenes forensic analysis, calculation of damages and rebuttal report commentary for various investment governance, investment performance, fiduciary breach, prudence, risk and valuation matters.

Alexandra Poe, Partner
Reed Smith, New York

She has over 25 years of experience in investment management practice counseling managers of hedge funds, private equity funds, institutional accounts, mutual funds and broker-dealer advised programs. She counsels hedge and private equity fund advisers in all stages of their business and due diligence matters.



New Regulations About ERISA Plan Fee Disclosures

According to a July 13, 2011 press release from the U.S. Department of Labor, a final regulation is now in place regarding retirement plan fee disclosures. Pursuant to ERISA Section 408(b)(2), a rule issued in interim form on July 16, 2010, will now be made permanent with an effective date of April 1, 2012. The goal is to enhance transparency about how much money is paid to pension plans by service providers.

Click here to read the official announcement. Click here to read 29 CFS Part 2550, "Reasonable Contract or Arrangement Under Section 408(b)(2) - Fee Disclosure; Interim Final Rule," issued on July 16, 2010.

Given the lawsuits on the topic of ERISA plan fees paid to service providers, it will be interesting to review disclosure results after full implementation occurs.

Help With Form 5500 Reporting

For those in need of help, click to access the "Troubleshooter's Guide to Filing the ERISA Annual Report" (U.S. Department of Labor, October 2010). This 70-page publication includes a handy reference chart that relates to the Form 5500 and Form 5500-SF (for small firms), along with related attachments. Another helpful resource is "FAQs About The 2009 Form 5500 Schedule C."

School's still out regarding the extent to which plan sponsors will be able to comply with new rules. So far, Schedule C seems to be a sticking point with numerous questions being asked about how to properly report "indirect" versus "direct" compensation to service providers.

As more pension plans allocate monies to mutual funds, hedge funds, private equity funds and funds of funds, they will need to report details about fees paid to these organizations as they too are now deemed service providers.

Free Educational Webinar About Fee Assessment, Form 5500 Reporting Compliance and Fiduciary Liability

Please join ERISA attorney Linda Ursin and Ms. Jamie Greenleaf, Senior Partner with Cafaro Greenleaf on June 29 from Noon to 1:00 PM EST to learn more about assessing management fees for reasonableness, new Form 5500 rules and fiduciary liability for failure of oversight of service providers. To register, visit

Fees, Form 5500 and Fiduciary Liability - The New F Words

Please join Investment Governance, Inc. CEO - Dr. Susan Mangiero - for a one hour discussion with ERISA attorney, Linda Ursin, and Ms. Jamie Greenleaf, Senior Partner with Cafaro Greenleaf on June 29 from Noon to 1:00 PM EST.

Attendees will learn more about:

1. Assessing management fees for reasonableness
2. Form 5500 compliance rules
3. Fiduciary liability for failiure of oversight of service providers

And much more!

Click here to register for this free educational webinar.

Are Limited Partners Getting the Upper Hand?

On March 1, 2010, Dr. Susan Mangiero, CEO of Investment Governance, Inc. sat down to talk to financial and strategy expert, Mr. Pascal Levensohn. In this sixth question of ten, read what this Investment Governance, Inc. Advisory Board member has to say about the balance of power between institutional investors and venture capital fund managers. Click here to read Mr. Levensohn's impressive bio.

SUSAN: You have some thoughts about contract terms. Do you think the trend is shifting in favor of institutional limited partners ("LPs") to receive better terms as venture capital ("VC") fund investors?

PASCAL: Certainly as the sources of capital have become more  selective and scarce, the general partners ("GPs") have had to become more aware of LP concerns over terms. While  the GPs in top tier funds will still be able to maintain favorable terms (and LPs will always want to get into their funds), even these GPs have made some  concessions to maintain a supportive investor base. For example, recent press  reports have indicated that at least two prominent funds lowered their "premium" carry structures, making the payment of a 30% carry rate subject  to the return of a multiple of the investors' capital. For those other funds that are not oversubscribed, there will undoubtedly be some pressure on terms. Though there has been a lot of talk about the terms suggested in the recent guidelines published by the Institutional Limited Partners Association ("ILPA"), these guidelines have not fully caught hold (and some proposed terms –like joint and several liability on clawbacks — may be seen as too extreme). Still, in the current fundraising environment, there will certainly be some movement to provide an  alignment of interests between LPs and GPs, while trying to maintain the appropriate incentives for the GPs.

401(k) Fee Complaints Go Populist

In reading "Earlier Retirement: Beating Back the High Fees" by Wall Street Journal reporter Eleanor Laise (March 6, 2010), I felt an immediate empathy for the subject of the article, Mr. Jeff Powelson. Apparently, this 401(k) plan participant lobbied his management hard to pay lower fees by replacing actively managed funds with index-tracking vehicles.

I am reminded by my own sorry experience with a "fully transparent" vendor a month ago, albeit a different product. Not having rented a car in many years, I okayed a $60+ per day fee to trek from a large Midwest airport to an important business meeting about 90 miles away. Our travel agent told me that it would cost $61 to rent a mid-size car for my colleague and me each day. I kept thinking how much we'd save by not having a van pick us up. Lo and behold when we arrived to sign the paperwork, quelle surprise! We were bombarded with hidden fees aplenty.

  • If I paid with my company credit card, my colleague could not drive without me paying a surcharge of $21 per day.
  • We could pre-pay for the gas at $2.98 per gallon or pay $7.98 per gallon the next day if we ran out of time to refuel before returning the car.
  • Insurance would cost us about $80 per day.
  • The use of a GPS device would be another $20 or $30.

A car that was supposed to cost less than $100 for our one-day excursion ended up costing about $220 with the various add-ons. More than the money, what upset me was that the car company would only let me view the numbers on an electronic screen and could not print out the contract and tally for me to review.

For those retirees (existing and prospective), fees deemed excessive, hidden and unfair are causing quite a stir. It's one thing to make a decision based on what you think is full information, only to discover that your wallet is being emptied quickly. 

More complete disclosure is one answer though, as Ms. Laise points out, what does that exactly mean? Should fees be decomposed by type of expense such as "investment management, plan administration, transaction costs and other items?"

A few basis points may not seem like much but, compounded over the years, it adds up. Looking under the hood sounds right but assumes that the latch quickly gives away. If money managers and plan sponsors alike are reluctant to provide details, it will be tough going for individual savers. Also smaller companies that want to provide generous benefits may not have the negotiating power to move away from "retail" pricing. That said, the issue of fees hits home. Companies are likely going to have to move towards enhanced reporting or risk upsetting their workers who could possibly make a bee line for the exit door. When skilled and productive workers are hard to find, that outcome is far from optimal.

Some Venture Capital Firms Lower Fees

According to Wall Street Journal reporter Pui-Wing Tam, hedge funds are not alone in reducing their fees to entice investors. As laid out in "Venture Funds Sweetening the Terms," fund-raising is down 65% from $58.2 billion in 2008 to $20.4 billion as of the beginning of November 2009. To offset a difficult economic environment, allay concerns about longer times to exit and diminished returns reported by some managers, performance-linked fees are being put on the table.

In a related article in the same paper, the Initial Public Offering ("IPO") thaw is described as imminent. According to "Issuers Look to 2010" by Lynn Cowan (November 23, 2009), underwriters prepare to help private businesses make their public debut. Notably, nearly 40 companies have "filed paperwork to start the IPO process, compared with eight during the same period of 2008."

It will be interesting to watch whether IPO-related liquidity leads to any retraction of performance-linked venture capital fees currently being offered to limited partners.

A Halloween Trick or a Halloween Trick from the Eighth Circuit?

ERISA legal expert and Ropes & Gray LLP partner, Attorney Andrew L. Oringer provides an interesting insight into a recent case about the investment of excess assets and prudence. The case he cites can be downloaded by clicking here. Note the court's opinion on page 5 wherein it writes that the plaintiff, seeking redress over a question of fees paid by the plan, cannot "bring suit because the plan's surplus was sufficiently large that the 'investment loss did not cause actual injury to plaintiff's interests in the Plan'."

Our thanks to Attorney Oringer for his contribution, provided below.

A Scary Halloween Gift from the Eighth Circuit?

So here's a question - you're managing an overfunded defined benefit plan (remember those) and you want to let your guard down. You want to roll the dice a bit or push the limit of what you can do with ancillary (non-investment) motivations, and you figure you can do so because you're playing with house money. At least, you want to play around just with some of the excess. Or maybe you're just a touch careless, albeit unintentionally so. What's the big deal?  After all, participants and beneficiaries are going to get their money, without government help, unless the whole overfunded thing goes to heck in a hand basket and turns radically south.

Now, you'd expect that you might be on the wrong end of this one, so, as your feet get colder, you poke around a bit. And what do you find? You find that you may indeed have a friend or two in the Eighth Circuit with an ever-so-slightly delayed Halloween present for you.  In McCullough v. AEGON USA, No. 08-1952 (8th Cir. Nov. 3, 2009), which follows its earlier decision in Minnesota Mining and Manufacturing, 284 F.3d 901 (8th Cir. 2002), the Eighth Circuit in effect seems to hold that one cannot violate the prudence rules with respect to the investment of excess assets.  (Note that the widely discussed 3M case may well be wrong on both of the issues considered there.)  Assuming AEGON is not reviewed en banc and reversed on rehearing, its confirmation of the 3M decision seems like a welcome development for those seeking to limit potential liability for investment decisions under a DB plan.

My advice, however, is to be careful, real careful, even in the Eighth Circuit. The reasoning of AEGON and 3M is so suspect that, outside the Eighth Circuit you would draw comfort from these cases at your own peril, and, even within the Eighth Circuit, I think you'd have to be at least a little concerned that any given case could be reversed by the nine old and young men and women in the black robes. Having said that, the cases are certainly nice precedent if you need to use them defensively

So: "Boo" or "Boo!" depending on your perspective.

Hamsters and Investment Governance

The plight of the hamster is simple. He is cute, furry and going nowhere fast. Sure he gets exercise but, measured in inches and miles, he's stuck in the same place, treading the same pattern over and over again.

Lest this sound like a zany rant from a busy blogger, might I suggest that the current spate of "pay to play" scandals reflects what some in the industry have been saying for years? Be scared, be very scared about the dsyfunction that is roiling financial markets. 

With respect to writer George Santayana, "Those who cannot learn from history are doomed to repeat it." With Enron, Worldcom and Bear Stearns far from a distant memory, why on earth are we still reading about bad players who end up costing taxpayers, shareholders and innocent bystanders gazillions of dollars? Worse yet, those individuals who wear the fiduciary hat proudly are being unfairly tainted by those who should know better and/or simply do not care about the lives they ruin with their bad acts.

Recent articles about California and New York pension problems only add fuel to the fire and leave most folks scratching their heads, asking legitimate questions, some of which are listed below:

  • Given existing regulations, why are there so many scandals?
  • Where is the board oversight that is supposed to prevent conflicts of interest or at least nip things in the bud before losses mount?
  • How much are Sally and Joe "everyperson" supposed to tolerate in terms of broken trust on the part of those tasked with leadership?
  • Why aren't major lessons being learned sooner than later?

As an ardent advocate of capitalism (and no, we do not have a pure capitalistic system in place anywhere, contrary to Michael Moore's movie lament), I find the current state of affairs impossible to defend.

Bad practices have got to stop. We need to be moving forward, not running around and around, making no progress and chasing our tails. Let me also add that I am not objective here. Our company (newly named Investment Governance, Inc.) has been busy at work for nearly a year, building investment "best practice" tools (to debut in short order). What has kept our team going lo these many months of 15 hour days are the repeated and strident cheers from all the good guys and gals who take their institutional fiduciary work seriously and want things to improve in a big way.

Bravo to those for whom trust is a sacred word! We seek to help you gain the recognition and support you so richly deserve. 

What is the Proper Role of an Investment Consultant?


In response to my post about the merger of Towers Perrin and Watson Wyatt ("Two Giants Merge - Que Pasa?" June 29, 2009), I wrote that generalists are finding it tough going in terms of assisting pension decision-makers, in large part because the issues that confront them are becoming more complex. Though my statement was not directed to any particular firm and reflected what I often hear from pension executives, one reader took me to task.

Mr. Alberto Dominguez writes that "The folks who work at Towers Perrin (disclosure: that would include me) and Watson Wyatt are hardly generalists. One argument in favor of the merger is that it will allow an even greater depth of talent and more specialization, enhancing the ability to assist clients with these increasingly specialized decisions." (Check out Alberto's blog on pension issues from an actuary's perspective, "What's An Actuary?". Also note that he has given me permission to reprint his comments but with the caveat that he is not rendering an official statement on behalf of Towers Perrin.)

In speaking to industry experts about the consulting industry in general, several trends appear to be taking hold. Anyone who wants to guest blog about this topic or offer their opinion (for attribution or not) is encouraged to email Pension Governance, Incorporated at

This list (which is far from exhaustive) includes:

  • Greater tilt towards specialization under one roof if seen by investment executives as being easier than contracting with multiple parties
  • A desire to have a consultant wear the hat of fiduciary continues to have appeal if it is affordable, noting that most organizations will logically charge more for greater liability exposure
  • Strident calls for transparency with respect to who is doing what, how and on what basis in terms of fees and buy-sell relationships.

Keep in mind that while consultants are being asked to do more, there are tremendous pressures to contain costs on the part of the organizations that write checks. There is no doubt that the investment consulting world is starting to change. As with any period of tumult, opportunities are there for those who know where to look.

Are Pensions the New Power Players In Hedge Fund Land?

According to "Hedge Fund Power Shift Could Be A Good Thing," Securities Industry News reporter Carol Curtis (May 18, 2009) posits that hedge funds will benefit from a recent push to lower fees. Say what? Yes indeed. The thinking goes like this. As pensions push for lower fees and improved transparency from hedge fund and private equity fund managers alike, their win may thwart U.S. and global attempts to regulate alternatives. This in turn will put smiles on the faces of non-traditional fund managers, making for interesting bedfellows all the way round.

Speaking of full disclosures, I was interviewed for this article by Carol Curtis. I pointed out the nature of recent demands for concessions, adding that pensions, endowments and foundations should ask about the make up of both administrative and performance fees rather than relying on gross percentages.

Suppose an institutional investor is comparing Hedge Fund A against Hedge Fund B. The latter may spend more on operations because it licenses a sophisticated risk management system which in turn helps that fund monitor its holdings on a regular basis. Is the "cheaper" fund the better choice? It depends on a variety of issues. The point is that total fees charged may not tell the full story. Institutional investors will want to understand the nature of spending and the basis on which performance numbers are calculated, at a minimum.

Click to read this opinion piece. You may need a password to access the full article.

Hegemony in Alternatives Land - Are Pensions Getting the Upper Hand?

According to "Investors warn private equity over cash calls" (March 26, 2009), Reuters reporter Simon Meads writes that private equity firms are facing "intense pressure" from limited partners (pensions, endowments and foundations). Cash strapped themselves, institutional investors are telling asset managers not to come knocking on cash infusion doors any time soon.

Does this phenomenon present a fiduciary conundrum? For one thing, might a limited partner be sued for a contractual breach if they refuse to pony up additional monies? Second, could a dearth of new cash making its way to private equity fund managers end up creating more financial pain for the limited partners? After all, if a private equity and/or venture capital fund finds itself short of the almighty dollar (or other currency), it may be unable to invest in new companies deemed to be high growth and/or be hamstrung from keeping current portfolio companies afloat. On the other hand, limited partners may be reeling from their own pain (whether Madoff induced, stemming from equity losses or something else) and figure that the cost of incremental disbursements outweighs the expense of abstaining.

One thing seems clear.

Institutional investors are demanding more for less. In "Calpers Tells Hedge Funds to Fix Terms -- or Else" (March 28, 2009), Wall Street Journal reporters Jenny Strasburg and Craig Karmin write that this large California giant is "demanding better terms from hedge funds, including lower prices and 'clawbacks' of fees if performance weakens." Said to have been sent to 26 hedge and 9 funds of funds, a March 11, 2009 memo outlines terms, with a proviso that counter terms will be considered.

In a March 6, 2009 article by the same two writers, the deputy chief investment officer for the Utah Retirement System echoes similar sentiments. In his "Summary of Preferred Hedge Fund Terms," Larry Powell calls for lower fees, adding that "management fees should be used to cover operating expenses only, and are not appropriate funding sources for staff bonuses, business reinvestment, strategy expansion, or wealth accumulation by partners." The 4-page letter urges a share structure that transfers "liquidity risk evenly among commingled investors" that could result in how gates, lock-ups and redemption terms apply to short and long-term investors, respectively. Regarding disclosures, Powell describes a minimum laundry list to include items such as:

  • Annual audited financial statements
  • Quarterly information about fees, operational costs, concentration of clients and soft dollar activity
  • Monthly Net Asset Values, return attribution by strategy, geography and/or sector, largest long/short positions, leverage at the fund and strategy level
  • Weekly return attributions and month-to-date estimates of return.

We've heard numerous institutional investors put a stake in the ground for what they perceive to be a more level playing field (their words). Just a few months ago, I led a workshop on risk management and "hard to value" investing red flags to a group of large public plan auditors. Many of the audience members described a "disclose" or "we'll walk" policy now in force with respect to alternative funds. (Hopefully it goes without saying that not every alternative fund is a "hard to value" fund.)

Several things come to mind. Could demands from institutional investors be potent enough, if met, to stave off new regulatory mandates, some of which are outlined in "Does More Financial Regulation Make Us Safer?" (March 29, 2009)? Second, might we see a flurry of alternative fund manager fee-related lawsuits, similar to 401(k) "excessive" allegations that are making their way through the court system?

The match is on - investor versus manager. Who will get the biggest slice of the pie going forward with respect to economic rights?

Is 2 and 20 Soon to be Gone?

Wall Street Journal reporters describe a trend that some believe was once only urban legend, namely hedge fund managers cutting their fees. In "Hedge Funds' Capital Idea: Fee Cuts" (September 9, 2008), Jenny Strasburg and Craig Karmin describe a new balance of power in which investors are being courted to stay the course rather than pull out their money in search of greener pastures. Replete with examples, the article suggests that jittery institutions may get a big discount on fees if they agree to lock-up periods or give the fund managers ample time to recover losses or improve on sub-par performance.

This makes sense from the hedge fund managers' perspective, especially those who face unprecedented redemption requests. From the pension investors' vantage point, things are not so clear. Yes, it's great to be able to pay lower fees but if the price of doing so is the realization of a mediocre risk-adjusted return profile, plan sponsors may be better off rethinking their allocation to that fund. As with everything else, it's seldom so simple. Unwinding a position may be expensive in terms of transaction costs alone. Then there is the issue of what should replace the hedge fund, if jettisoned from the pension portfolio.

What will be interesting to watch is whether other hedge funds feel pressured to follow suit in terms of dropping fees.

New Book on 401(k) Issues

In Fixing the 401(k): What Fiduciaries Must Know (And Do) To Help Employees Retire Successfully, author Joshua P. Itzoe suggests that the 401(k) industry is broken and in bad need of repair. As many employers migrate away from defined benefit plans to defined contribution plans, it is critical to understand any weaknesses in the current system and work vigorously to correct them.

Chapter 1 states conflicts of interest and opaque fee disclosures as two of the biggest issues faced by the 401(k) industry. Chapter 3 explains basic fiduciary duties as codified by U.S. pension law in the form of ERISA, co-fiduciary liability and how fiduciary types differ from one another. Subsequent chapters are rich with descriptions of relevant industry players (and there are many of them), inherent conflicts of interest and the generally accepted compensation arrangement for each category of service provider. Though there is an entire chapter devoted to types of fees, it would have been nice to sink one's teeth into some meaty math examples, along with some empirical data about magnitude and dispersion of fees across plans. 

Written for 401(k) fiduciaries, the basic nature of the book is both refreshing but worrisome. If current plan fiduciaries (the target market for the book) are unaware of their core duties, how have they been getting along so far? Far from being pedantic, Mr. Itzoe includes several chapters with concrete advice for improving 401(k) fiduciary practices. His provision of important questions at the end of each chapter is a nice touch, along with some helpful appendices such as a "Sample Fiduciary Audit File," "20 Steps to 404(c) Compliance" and a relatively long glossary. There is no index but a short bibliography is provided for interested readers.

For more information, check out Click to read the author's bio. At $13 and change, I recommend this primer. Kudos to Mr. Itzoe, CFP and Accredited Investment Fiduciary, for putting forth a solid book on an important topic.

New Study Links Higher Fees to Passive Strategies

A new study, published by Watson Wyatt, suggests that some pension funds are weary of expending higher investment costs. In "A fairer deal on fees," authors find that "pension funds around the world are paying on average 50% more in fees than they were five years ago" with costs now averaging north of 100 basis points. The study goes on to suggest that external asset managers and brokers get the lion's share, in exchange for promises of alpha but delivery of beta. As market conditions sour, pension decision-makers are going to feel even more pressure to justify the fees they pay to outsiders.

No surprise then that some pension funds are looking to indexing as a salvo. In "Pensions turn to passive management," Financial Times reporter Owen Walker (May 4, 2008) writes that assets being allocated to index-tracking funds are on the rise. John Davies of Standard & Poor's adds that financial service providers are fast developing products to appeal to thrifty fiduciaries.

Lest a pension fiduciary think that indexing (in whatever form) lets them off the hook, it's not that simple. If less money is apportioned to active managers, the ones who are selected (or kept) must do "extremely well" to offset any lower returns from the passive component of the overall portfolio. Assessing risk management policies of external managers remains a critical task.


Fair Disclosure for Retirement Security Act of 2007 Soon Up for a Vote

On April 16, 2008, members of the U.S. House Education and Labor Committee will mark up the proposed bill that, if adopted, will mandate additional disclosures as relates to retirement plan fees (1:00 p.m. in room 2175 Rayburn H.O.B.) As fee-related litigation soars (frequency and size of alleged economic damages) and individuals struggle to ready themselves for a long retirement haul (due to extended life spans), the import of any disclosure regulation is considerable.

To learn more, check out these resources. Note that the bill is renamed the "Fair Disclosure for Retirement Security Act of 2008."

How Much Does Your Investment Banker or Asset Manager Make?

According to "Pay at Investment Banks Eclipses All Private Jobs" (September 1, 2007), New York Times reporter David Cay Johnston tells the tale of two cities. There is Investment Banker Land where the typical weekly pay exceeds $8,300 and then there is Everyone Else Land. (In Fairfield County, Connecticut - home to many corporations and hedge funds -  the mean pay, as reported by the Bureau of Labor Statistics, was $23,846 a week.) Click here for a copy of this government report, with a breakdown in average pay by various geographic areas.

This blog's author is the first to say "hooray for capitalism." If financial institutions pay individuals the big bucks because they can spin flax into gold for shareholders, arguably a happy marriage between supply and demand has taken place. However, and notwithstanding the fact that we can vigorously debate the "reasonableness" of salaries all day long, plan sponsors face a dilemma.

1. How do pension fiduciaries deal with the gap between what they can afford to pay financial experts and what the big banks pay, especially at a time when skilled analysts and risk managers are desperately needed by pension plans, regardless of plan type?

2. If any particular fund manager is reporting losses or sub-par performance, how do pension fiduciaries justify a decision to retain a manager and/or investment bank that treats itself well in the compensation department? In other words, how does manager pay get factored into the short-term versus long-term retention decision?

3. How do pension fiduciaries assess "acceptable" compensation paid to asset managers and bankers? Do more complex strategies require the installation of smarter and more experienced personnel who should charge more as a result?

4. How much detail should be provided to plan beneficiaries with respect to compensation of asset managers and/or investment bankers who work with the  plan?

Rather than tell you what I think, email your feedback about investment banking and money management compensation. Let us know if we have permission to post your response.

Disclosure and Fiduciary Implications - Big Problem?

Disclosure is fast becoming the proverbial four letter word in pension fiduciary land. Critical questions abound.

  • How much information do pension fiduciaries need in order to make an "informed" decision?
  • Who should provide that information, how often and in what form?
  • Is there a danger of having "too much" information?
  • What does the law currently require?
  • What information is currently available and to whom?
  • Is there an industry consensus about what constitutes "good quality" information?
  • What are the consequences of "incomplete" disclosure and are they equally unpleasant for plan participants, shareholders, taxpayers and plan sponsors?
  • What current roadblocks stand in the way of "better" disclosure (once that term is defined)?

 The topic of disclosure and transparency is as broad as it is critical to good plan governance. We've written extensively about this topic as applied to investment risk and will continue to do so. Click here if you would like to receive copies of some of our many articles. After hours of work, our research librarians are completing an Ebook on the topic of pension information resources. Click here if you want to be notified of its publication.

With a copyright date of July 4, 2007 (symbolic perhaps?), independent fiduciary Matthew D. Hutcheson addresses the topic of 401(k) plan information in "Retirement Plan Disclosure: A Declaration of Ethical Principles and Legal Obligations." Not known for being shy about his point of view, Hutcheson makes a compelling case for additional, complete and user-friendly disclosure about fees and related compensation arrangements.

“The Department (Department of Labor) emphasizes that it expects a fiduciary, prior to entering into a performance based compensation arrangement, to fully understand the compensation formula and the risks associated with this manner of compensation, following disclosure by the investment manager of all relevant information pertaining to the proposed arrangement. [Advisory Opinion Letter 1989 WL 435076 (ERISA)]

Thus, for a fiduciary to know all relevant information ahead of time, service providers must disclose all relevant information prior to entering into an engagement. The failure to disclose all relevant information effectively forces fiduciaries to violate the law unknowingly. The SEC has taken action against various service providers of 401(k) plans because of hidden compensation arrangements which obscured relevant information to fiduciaries. "

Hutcheson provides solid legal and regulatory evidence in support of full disclosure of all types of fees and related non-fee agreements. In addition, he reminds readers that fees impact economic performance and are therefore integral to any kind of investment decision-making. Would we buy a car or get surgery without enough information to gauge potential risk and rewards? 

His message comes at an opportune moment to begin a national "no holds barred" conversation about fees, fiduciary duty and protection of plan participants.  Countless companies are switching from defined benefit plans to defined contribution structures. In loco parentis NOT.  While employers transfer more responsibility to employees, research suggests that individuals are saving much less than is minimally needed to secure a reasonable lifestyle in retirement. Add to that an uncertain outlook for the long-term viability of Social Security and Medicare (and international equivalents to the U.S. post-employment safety net) and policy-makers are starting to take notice. Not a day too soon for many folks. If you think a train is about to crash, why wait to seek preventative measures?

Hutcheson concludes that "industry and regulators must either: (a) Return to the model originally contemplated under ERISA, in which recognized fiduciaries would make all decisions regarding trust assets; or (b) Empower participants to make their own individual decisions with respect to the assets in their personal tax-deferred 401(k) accounts. If the chosen course is to return to the original intent of ERISA, then fiduciaries of 401(k) plans must be armed with all relevant information necessary to construct a low-cost prudent portfolio for the benefit of the participants. Alternatively, if the chosen course is to enable those holding tax-deferred investments to, in essence, serve as their own mini-fiduciaries, then they must be afforded the information necessary to construct the same sort of prudent, low cost personal portfolio."

Those who advocate individual responsibility, and therefore favor the idea of choice at the employee level, get push-back from some that Sally or Joe "Every Worker" is unlikely to delve deep with respect to investment issues. Yet people make decisions for themselves every day - choosing a doctor, buying a car, voting, changing jobs and so on. But, for argument's sake, let's agree that a "mini fiduciarization" of the workforce is impractical, infeasible or otherwise unappealing. What then?

If only plan sponsors are to decide on all things 401(k), should we not be seriously engaged in identifying what makes for a "top quality" fiduciary? Besides access to good and complete information about fees and other pecuniary arrangements, we've long advocated a requirement for "suitable" qualifications (education and experience) before someone makes multi-million decisions with other people's money. To be clear, the use of the term "require" here refers to that which is self-imposed by plan sponsors, perhaps with the help of various industry and fiduciary organizations. Mandatory requirements would be problemmatic and could exacerbate the situation. (Our firm, Pension Governance, LLC provides fiduciary training, process checks and research in the areas of investment risk and valuation. Part of a growing industry to help fiduciaries do a better job, we complement work done by our partners but always with the same message. Good process is everything!)

On the topic of information, the more voices the better as long as it gets us to an enlightened place. This means that "good" disclosure would be seen as a value-enhancing tool for all concerned parties, not another costly, "go nowhere" exercise.

To read the full text of Hutcheson's article, click here. You will be taken to the Social Science Research Network site. Pension Governance, LLC is a proud sponsor of four SSRN sections. Click here to learn more about our sponsorship of a pension risk management section (created just for us) and a research section about mutual funds and hedge funds. Click here to learn more about our sponsorship of a research section about employment law and litigation and a research section about corporate governance.

For further reading, click on the title of each item listed below:

"Who Wants to be a Fiduciary Anyhow?"

"Do You Know the True Cost of Your Retirement Plan?"

"Searching for Hidden Treasure"

"Do We Need an Easy Button for Fiduciaries?"

"401(k) Fee Analysis - Who Benefits?"

Pension Fiduciaries and Hedge Fund Clones, Fees and Fiduciary Duty

In a June 22 article, Lipper HedgeWorld reporter Emma Trincal writes about the imminent debut of a hedge fund replication index product, courtesy of Barclays Capital. According to Managing Director and Head of Equity Derivatives, Hassan Houari cites research that "up to 80% of the performance of hedge fund indexes" can be explained by changes in the market. Houari further adds that Barclays seeks to offer a "cheaper, more liquid and more transparent alternative." Click here to read the article entitled "Barclays to Debut Hedge Fund Clone." (Registration is required.)

Clones are a popular topic these days. Last week, during Part Two of the Hedge Fund ToolboxSM, sponsored by Pension Governance, LLC, Dr. Susan Mangiero, CFA and Accredited Valuation Analyst talked about increasing pressure for fiduciaries to justify fees. "Amid a flurry of 401(k) lawsuits alleging 'excessive' fees, it doesn't take a rocket scientist to know that hedge fund fees are next. If a plan sponsor can synthesize a signicant portion of expected returns for a particular hedge fund strategy, how can they justify paying for active management?"

Not everyone concurs that replication is possible. During the June 19 online event, co-founder of Bulldog Investors and the David who conquered Goliath SEC in the battle over regulation of hedge funds, Philip Goldstein challenged the notion that investors would be better off with a passive approach. "An Elvis impersonator is not Elvis." Ed Stavetski, CFA and Chief Investment Strategist for CMG Investment Advisors, LLC added that "Many hedge fund professionals work hard to identify value on behalf of their investors."

Emphasizing fiduciary duty, Ed Lynch, Senior Vice President and Investment Officer with Dietz & Lynch Financial Strategies Group of Wachovia Securities, LLC, reminded listeners that ERISA is clear on fiduciary duties that mandate a rigorous analysis of fees. Echoing the urgent need for discipline in the form of a systematic process to assess alternatives (in fact, any type of investment), Mangiero elaborated. "Fees drive performance and performance drives strategic asset allocation and re-balancing decisions. Plan sponsors need to get it right. Every trade costs money."

Click here to purchase the broadcast and slides for a nominal fee. (Past webinars are listed in chronological order.) Pension Governance subscribers enjoy webinar access for no additional charge. Click here to subscribe.

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.

401(k) Plan Governance Webinar

Pension Governance, LLC is registered with CFA Institute as an Approved Provider of professional development programs. This program is eligible for 1.5 PD credit hours as granted by CFA Institute.

06/04/2007 : 12:00 pm to 1:15 pm EST

Join us for a lively discussion about 401(k) investment fiduciary issues in the aftermath of the Pension Protection Act of 2006, emphasizing economic and operational issues.

Who Should Attend:
Money managers, plan sponsors, plan administrators, custodians, pension consultants, pension attorneys or board members with responsibilities for selection of investment fiduciary advisors

Learning Points:
Persons who attend this 75-minute webinar will learn the following:
  • Description of fiduciary duties under ERISA
  • Discussion of procedural prudence as relates to 401(k) plan selection of fiduciary advisors
  • Overview of safe harbor and selection of fiduciary advisor pursuant to the Pension Protection Act of 2006
  • Litigation trends in the area of investment fiduciary breach as relates to plan sponsors and service providers such as consultants
  • Fiduciary investment process for assessing 401(k) provider fees
  • Role of fiduciary advisor in providing financial education
  • Governance considerations with respect to selection of default investment 
  • Structural changes in money management industry in response to material shift away from defined benefit plans
  • Fiduciary advisor “red flag” practices such as soft dollar questions, revenue-sharing, limited disclosure
  • Dr. Susan M. Mangiero, AIFA, AVA, CFA, FRM - Moderator (Pension Governance, LLC)
  • Mr. Blaine F. Aikin, AIF®, CFA, CFP® - Speaker (Fiduciary36)
  • Mr. David J. Bauer - Speaker (Casey, Quirk & Associates LLC)
  • Mr. David Vriesenga - Speaker (Centre for Fiduciary Excellence, LLC)
Note: Subscribers to receive free access to this webinar.


Click here to register.

Pension Governance, LLC Sponsors Pension Risk Management Research Site

Pension Governance, LLC is proud to sponsor a brand new section of the Social Science Research Network (SSRN). Part of SSRN's Financial Economics Network (FEN), Pension Risk Management publishes working and accepted paper abstracts covering a range of topics in the field. These include liability-driven investing, fiduciary assessment of hedge fund and private equity investments, organization and governance of defined benefit and defined contribution plans, selection of default investments such as target date funds, appropriateness of company stock for 401(k) plans, evaluation of money managers' fees, strategic asset allocation, fiduciary duty to hedge and use of derivatives.

Working with the SSRN team, co-editors Dr. Shantaram Hegde and Dr. Susan M. Mangiero encourage contributions in this exciting and critically important research area. At no other time has there arguably been such an urgent need to understand pension investment risk issues and competing solutions. 

Dr. Hegde is Professor of Finance at the University of Connecticut and author of many papers on derivatives, market microstructure and risk management. Click here to read his bio. Dr. Mangiero is author of Risk Management for Pensions, Endowments and Foundations. An Accredited Valuation Analyst and certified Financial Risk Manager, she is President and CEO of Pension Governance, LLC. Click here to read her bio.

Joining Dr. Hegde and Dr. Mangiero as part of the Pension Risk Management Abstracts Advisory Board is a team of experts in the areas of risk management, valuation and actuarial science:

Dr. Stephen Figlewski - Professor of Finance (New York University)

Allen Michel - Professor of Finance (Boston University)

Steven Siegel - Research Actuary (Society of Actuaries)

Gavin Watson - Business Manager for Asset Managers (RiskMetrics Group).

According to Dr. Mangiero,  "With many challenges facing pension fiduciaries, our goal is to help facilitate a conversation about pension finance, risk and valuation on behalf of investment stewards for millions of plan participants worldwide. The Pension Governance, LLC team is deeply grateful for the commitment of this top-notch team to promote good ideas in these areas. We look forward to making pension risk management the topic of choice for academic researchers and practitioners."

401(k) Fee Fights - Here We Go

On March 29, Reuters reported that  Judge David Herndon of the U.S. District Court for the Southern District of Illinois had given the green light for a 401(k) fee case to proceed. One of about a dozen lawsuits brought by St. Louis firm Schlicter, Bogard & Denton, plaintiffs allege that plan consultants were paid an "unreasonable" amount for record-keeping services rendered in 2004.

Coincidentally, on that same date, I listened to a lively discussion about fees, revenue-sharing and the state of 401(k) fee litigation. Moderated by Nell Hennessy, Fiduciary Counselors Inc. and sponsored by the American Bar Association, other speakers - Lynn Sarko (Keller Rohrbach LLP), Chris J. Rillo (Groom Law Group) and Kristen L. Zarenko (Office of Regulations and Interpretations, EBSA, US Department of Labor) - parried back and forth about procedural prudence, proper fee-related disclosure and new enforcement initiatives in the form of the Consultant/Advisor Program (CAP). Click here to read the program description. 

Always important, the topic of fee economics is arguably more so now since countless organizations are switching from traditional plans to defined contribution plans.

2007 looks to be an active year in terms of court-watching!

Congressional Examination of Plan Fees

Jerry Kalish tells us to buckle up for a bumpy ride now that Congress is ready to explore the issue of 401(k) fees. Click here to read his informative post.

Reiterating the emphasis on process, as written in an earlier post about 401(k) fees, "lower" fees are not necessarily "better" if plan participants "pay" for them in terms of additional restrictions on their money. Analogous to the idea of buying a luxury sedan versus something less fancy, price should reflect a variety of features for which people are willing to pay a premium. Whether fees are "high" or "low" for a specific plan and particular investment choice depends on a host of factors and requires a rigorous assessment of relevant information.

Process is everything!

401(k) Fee Analysis - Who Benefits?

Thanks to attorney Stephen Rosenberg for giving our 401(k) fee webinar a round of applause. In "401(k) Plan Fees and Breaches of Fiduciary Duty", Rosenberg writes "On the key issue of how to avoid incurring liability for breach of fiduciary duty as a result of the fees incurred by 401(k) plans and their impact on plan performance, the speakers emphasized a commitment to due diligence. In particular, the speakers favor a systemic and periodic review of the entire issue of the fees affecting the plan, and proper investigation and selection of funds and advisors with the issue of fees firmly in mind. In other words, don't put the plan together without thinking about the issues of fees and ensuring that the applicable fees are consistent with industry benchmarks, and even after you do that, don't just forget about the issue, but instead return to the topic regularly and make sure fees and performance remain appropriate."

Some other points are noteworthy, especially given questions that arose after the event.

1. A comprehensive fee analysis, done before manager selection and regularly thereafter, benefits multiple constituencies - plan sponsors, participants, shareholders, money managers and consultants.

2. While plan participants arguably have limited information, relative to what is available to plan sponsors, both groups should understand fee structures and the expected economic effect of different types of fees. Remember that all fees are not "created equal." For example, some fees may be front-ended or tied to performance and therefore differ as regards portfolio performance impact.

3. What looks like "higher" fees on the surface may not be necessarily "bad" (and this is a gross simplification). In part, it depends on what they represent. A plan participant could have more flexibility in one situation (i.e. fewer restrictions perhaps), thereby boosting base fees. It likewise depends on, apples-to-apples, how a particular fund's fee structure compares to an appropriate fee benchmark. Other issues might come into play. Bottom line - A thorough analysis is paramount.

4. Fees are influenced by many factors, including asset class, investment strategy, market structure, fund structure, performance, terms, regulation and competitiveness.

Regarding the process itself, the U.S. Department of Labor provides guidance in its online publication, "A Look At 401(k) Plan Fees."

Here are a few excerpts:

"Establish a prudent process for selecting investment alternatives and service providers

Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided

Select investment alternatives that are prudent and adequately diversified

Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices"

Other resources exist in the form of checklists such as those provided by the Foundation for Fiduciary Studies. Click here to access the "Self-Assessment of Fiduciary Excellence" for investment stewards, investment advisors and money managers, respectively.

More to come...

Focus on 401(k) Plan Fees

A flurry of lawsuits and investigations about 401(k) plan fees is moving center stage. Wall Street Journal reporter Tom Lauricella writes that New York State Attorney General Elliot Spitzer is close to concluding a settlement with a large insurance company "over allegations that it took undisclosed fees to promote certain funds in a retirement plan for New York State teachers." (See "Spitzer Aims At Another Mark: Fee Disclosure," Wall Street Journal, October 10, 2006.)

In "Suits Claim Excessive 401(k) Fees at 7 Firms", LA Times reporter Kathy M. Kristof describes allegations of excessive fees being borne by 401(k) plan participants at some of this country's largest businesses. Seeking class action status, the cases focus on whether "employees were charged millions of dollars in excessive management fees, which often were hidden in obscure agreements and not disclosed to the workers."

According to the U.S. Department of Labor website page entitled "Meeting Your Fiduciary Responsibilities", decision-makers are urged to analyze whether fees are "reasonable" when deciding on a money manager. In addition, fiduciaries should "compare all services to be provided with the total cost for each provider", "ask prospective providers for a detailed explanation of all fees associated with their investment options" and "specify how fees are paid."

New regulation is a factor too. ERISA attorney Fred Reish offers that the selection of a fiduciary advisor, pursuant to the Pension Protection Act of 2006, requires employers to "satisfy a fairly complex set of requirements that they did not need to satisfy in the past". One possible effect is that participants are harmed because of higher fees, "due to increased compliance burdens."

In the interest of full disclosure, I am writing an article with senior banker Ed Lynch and attorney Fred Reish about the rigorous process of comparing fees on an "apples-to-apples" basis. Send an email if you would like a copy of the paper when it is published.

Lawsuit Over Hidden Pension Fees

How much does a plan participant really pay in retirement plan fees and what is the impact on economic investment performance?

A report from describes "behind the scenes" currency exchange fees as one culprit.

The class action complaint, filed August 2 in Canada, questions a bank's practice of charging foreign exchange fees on stock trades in retirement accounts, alleging secrecy, "in breach of the defendants' contractual and fiduciary duties."

Pundits predict a more intense focus on the issue of 401(k) fees stateside, and abroad, for 401(k) look-alike products.

Several reasons account for this. For one thing, financially strapped retirees seek to minimize costs for fear of having insufficient funds to pay for their golden years. Losses or sub-par performance will only add to their upset and fees could be a big component. Second, disciplined investors plan ahead by making certain assumptions about future returns. They need to incorporate all relevant costs. Third, the Pension Protection Act, likely to become U.S. law, increases the likelihood that financial firms will sell more customized (but often costlier) retirement products to defined contribution plan participants.

Not surprisingly, regulators have expressed concern about fees and urged disclosure. This may only be the beginning of a "fee frenzy".

Do You Know the True Cost of Your Retirement Plan?

That a relationship between investment performance and fees exists is hardly news. Fees matter. However, it's not quite as simple as it may seem. Fees vary by amount, timing and form. A two percent fee, charged upfront, hurts more than a two percent fee that is levied on the back end. A no-load fund that charges higher annual expenses might cost an investor more than a fund with an upfront charge but lower annual expenses. For mutual funds and exchange-traded funds, the U.S. Securities and Exchange Commission provides a handy calculator with the qualifier that "the results should be compared for several funds or different classes of a single fund".

Importantly, lower may not necessarily mean better. Consider performance fees such as those charged by numerous hedge funds. If an investor understands and willingly acknowledges likely risks, a performance fee may be an acceptable price to pay for participating in returns that exceed a pre-specified benchmark.

However, good decision-making cannot take place in the dark. As described below and in a GAO report about mutual fund disclosure, transparency is not always easy to come by.

1. Database vendors typically provide returns on a gross basis because that is how they are reported by participating money managers. Evaluating a large number of funds requires manual adjustments to facilitate an "apples to apples" basis. This is time consuming to say the least and sometimes difficult to do.

2. Fees vary by type of fund, strategy and timing. Care must be exercised to take into account relevant factors.

3. Fees change over time. Past fees may not be a bellwether of future fees.

4. Reported performance may not reflect all elements of a portfolio as would be the case with side pockets or similar mechanisms. Refer to Barry Schachter's hedge fund blog for comments about side pockets.

5. Mutual fund expenses may not be reflected in published performance reports, forcing one to review the Statement of Additional Information.

6. Institutions and retail clients do not bear the same costs so fee analysis must incorporate any differences.

According to, New York Attorney General Eliot Spitzer announced plans to "examine how 401(k) investments are allocated and whether fund managers are exacting higher fees than participants believe they are paying".

What this portends is anyone's guess. Investigations have the potential to shed light on the important topic of investment fees. Of course, institutional investors should be asking lots of tough questions before they commit dollar one to any particular manager. In fact, it's their duty to behave prudently and proper inquiries, during the RFP process and in-person interviews, are a perfect time to dig deep.

Money Manager Compensation

Sir Francis Bacon said it all when he declared "knowledge is power". The more we know, the better equipped we are to make good decisions. This is why I am such a big advocate of better disclosure when it comes to all things financial (See the April 11, 2006 posting entitled "Practice What You Preach".)

So it was with great delight that I read Gretchen Morgenson's New York Times article this morning, in which she describes the opaque nature of fund manager compensation. Her point is a good one. The absence of information is made more acute by the fact that most of the large fund companies are private and therefore outside the reach of statutory requirements to tell all. Pulitzer Prize winner Morgenson references a recent letter from investment legend John C. Bogle. He writes about the urgent need to require mutual funds "to disclose the aggregate dollar amount of direct and indirect compensation paid to the five highest-paid executives of their manager and distributor".

Why is compensation disclosure important?

A lot of money is at stake. Managed funds are an integral part of the retirement planning process. According to the Investment Company Institute, retirement assets invested in mutual funds in 2004 approximated $3.07 trillion, with $1.6 trillion finding a home in defined contribution plans. Anything that impacts performance necessarily affects the financial security of employees and retirees. This includes fees which should reflect, among other things, the costs of operating a fund. How and why an individual manager is compensated speaks volumes about the expected return pattern of a particular fund. (Some of the other factors that determine returns include strategy, portfolio mix, risk management procedures, internal controls and market conditions.)

When actual returns deviate from forecasted returns (and initial asset selections have been made on the basis of expectations), an investor may find herself in the unhappy situation of not having enough money to satisfy an objective. Individual or institution, the end result is a funding gap in need of a solution.

John C. Bogle is not alone in asking questions about manager compensation. In May 2005, the U.S. Department of Labor and SEC published Selecting and Monitoring Pension Consultants - Tips for Plan Fiduciaries.

A broad and important topic, manager compensation and the relationship with pension consultants, is left for another day...