Establishing Risk Management Protocols for Defined Benefit Plans and Defined Contribution Plans

As a follow-up to my January 12, 2017 announcement about retirement plan risk management education with the Professional Risk Managers' International Association ("PRMIA"), I am delighted to announce a co-presenter for the February 23, 2017 learning event. Distinguished attorney Meaghan VerGow will talk about ERISA litigation and fiduciary risk management as part of "Establishing Risk Management Protocols for Defined Benefit Plans and Defined Contribution Plans." Click here to read Meaghan VerGow's impressive bio as law firm partner and ERISA expert with O'Melveny & Myers LLP.

Session One will convene from 10:00 am EST to 11:15 am EST live this Thursday. If you cannot make it in real time, the event can be downloaded for later viewing. It is the debut event of four CPE-qualified events. Speakers will examine risk management for retirement plans from both a governance and economics perspective. Topics to be discussed include the following:

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

Visit the PRMIA website to register for Session One and read about course content for Sessions Two through Four. Our exciting roster of co-speakers for these future events will be posted shortly on this blog at

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."

Pension Risk Management for Retirement Plans

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

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

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

                                                     A Virtual Training Series

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

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

Who Should Attend

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About the Presenter:

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

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

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

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!

ERISA Litigation Webinar Transcript Now Available

Seeking to accomplish a goal without having the right tools can result in frustration and possible failure. One solution is to get outside help when needed as long as the party being hired is knowledgeable and independent. Otherwise, what looks like a solution could quickly become a problem. Applied to ERISA plans, trouble might take the form of costly and time-consuming enforcement and/or litigation. Over the last few years, that reality has set in for more than a few employers.

Recognizing the importance of abiding by good governance principles, several of us agreed to speak as part of an educational webinar on April 8, 2015 about fiduciary tools, pitfalls and lessons learned. Sponsored by fi360 and entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors," this webinar joined Attorney Tom Clark (Counsel with the Wagner Law Group), Dr. Susan Mangiero (Managing Director with Fiduciary Leadership, LLC) and Mitchell Shames, Esquire (Partner with the Harrison Fiduciary Group) to address the (a) use of an independent fiduciary (b) clarifying what an outside vendor should be doing and (c) avoiding legal and economic landmines that have revealed themselves in prominent court cases and regulatory examinations.

If you missed the event, email for a copy of the slides. Click here to download the written transcript. Edited for clarity (and because the audio file is spotty in some places), this fourteen page document lays out cornerstone concepts and includes suggestions for plan sponsors and the advisers who serve them. These include, but are not limited to, the following:

  • The outsourced fiduciary market is growing in the United States and elsewhere.
  • When an outside party is hired by a plan sponsor, it is critical to specify responsibilities and contract accordingly. When an "expectations gap" exists, some critical tasks may be left wanting or not addressed at all.
  • When multiple fiduciaries are in place, a plan sponsor must ensure that a central person or team is adequately coordinating the efforts of all fiduciaries.
  • The newly proposed Conflict of Interest rule is predicted to materially change the landscape of fiduciary relationships between plan participants and retirement advisers.
  • A fiduciary status may exist due to either a contractual agreement or by virtue of the functions assumed by an individual or organization.
  • ERISA litigation is getting more attention these days, with a particular focus on fees, use of proprietary funds, revenue-sharing and disclosure of compensation paid to investment consultants, advisers and asset managers.
  • Demonstrating procedural prudence in part depends on what others in the industry are doing (or not doing as the case may be) and whether actions make sense for a given plan.
  • A renewed focus on disclosure and transparency is in the works according to comments made by the U.S. Department of Labor.
  • An independent fiduciary can be engaged for a singular transaction or for a task that continues over a long period of time.
  • An independent fiduciary can be engaged by either a defined contribution plan or defined benefit plan or both.
  • When there is a perception or reality of a conflict of interest, it may be prudent for an independent fiduciary to be engaged. The participants pay for said party because the independent fiduciary works on behalf of the participants.
  • The concept of co-fiduciary status is important and should be paid heed by any adviser who has an ERISA plan as a client.
  • Before delegating duties (to the extent allowed) to a third party, a plan sponsor should decide what financial issues should be vetted. Liquidity, the use of leverage by asset managers and asset allocation are a few of the many topics that a delegated fiduciary could be asked to measure, monitor and manage.
  • A fiduciary audit can be extremely helpful as a tool for identifying areas of improvement for an ERISA plan sponsor.

It may be no surprise that over 500 people registered for this educational webinar about fiduciary foibles. After forty years since its inception, ERISA remains a force that cannot be ignored.

Pension Risk Governance Blog Still Going Strong After Nine Years

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

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

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

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

ERISA Plan Investment Committee Governance

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

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

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

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

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

Institutional Asset Allocation

My comments about institutional asset allocation, along with those made by Mr. Ron Ryan (CEO, Ryan ALM) and Lynn Connolly (Principal, Harbor Peak, LLC), were well received on January 8, 2014. Part of a joint program that was sponsored by the Quantitative Work Alliance for Applied Finance, Education and Wisdom ("QWAFAFEW") and the Professional Risk Managers' International Association ("PRMIA"), our audience of investment professionals added to the lively debate about topics such as strategic versus tactical asset allocation, fees, role of the pension consultant and the likely capital market impact due to the implementation of strategies such as liability-driven investing ("LDI") and/or pension risk transfers ("PRT"). 

With the size of the U.S. retirement market at $20 trillion and counting, big money is at stake. Bad asset allocation decisions can lead to a cascade of economic woes. It is no surprise that fiduciary breach allegations in the form of ERISA lawsuits are increasingly focused on questions about the appropriateness of a given asset allocation mix and whether an investment consultant or financial advisor has helped or hindered the way that pension monies are allocated. Noteworthy is that scrutiny about the efficacy of the asset allocation process and resulting money mix can, and has been, applied to both defined benefit and defined contribution plans. Keep in mind that asset allocation decisions are likewise central to assessing popular financially engineered products such as target date funds. Accounting issues and how changing rules influence asset allocation decisions are yet another topic that we will tackle in coming months.

Click to access Susan Mangiero's asset allocation slides, distributed to members of the January 8 audience, and meant to peturb a discussion about this always essential topic. Interested readers can check out "Frequently Asked Questions About Target Date or Lifecycle Funds" (Investment Company Institute) and "Annual Survey of Large Pension Funds and Public Pension Reserve Funds: Report on pension funds' long-term investments" (OECD, October 2013).

If you have a specific question about asset allocation and/or the procedural process associated with asset-liability management, send an email to me.

Audrey Hepburn, Gary Cooper and Pension Governance

Grab the popcorn. If you haven't seen the 1957 romantic film, "Love in the Afternoon," check it out. No nudity. No violence. No swear words. Just some clever banter, courtesy of Maurice Chevalier, Gary Cooper and Audrey Hepburn. I love these old-fashioned movies for their charm and ease of viewing. They remind viewers that there are some things that never get old. Yes, good ideas are fresh, sound and worth revisiting again and again.

Pension governance comes to mind.

When I created in 2006, my goal was (and still is) to provide educational information about process. Not only is procedural prudence a key element of various trust rules and regulations, it is the cornerstone of effective investment, risk and asset-liability management. Indeed, it is easy to show that bad process can be hugely expensive for plan sponsors and beneficiaries alike.

At the inception of this pension blog, there were few studies and surveys about the topic of pension governance. Things have changed since then. Always an important topic, it is good to know that this "old-fashioned" topic is receiving more attention and will hopefully gain even more visibility over time.

According to a July 23, 2013 press release, a survey of U.K. employers indicates awareness of the importance of pension governance. Sponsored by SEI Investments, the survey answers reflect a frustration that companies need to do more since "current governance structure [do] not allow them to easily take advantage of market conditions to improve their funding levels, with many trustees unable to make informed and timely decisions due to a lack of resources, including limitations of time and/or expertise." Consultant relationships was another queried topic. Nearly one third of respondents expressed a "perceived lack of transparency around the costs associated with traditional investment consultants who often charge separately for investment reviews, manager changes, and ongoing support, and who are not fully accountable to the scheme." Click to learn more about how to access the SEI UK survey.

Will pension governance remain a classic a la Gary Cooper? One certainly hopes so. Too much is at stake for good process to end up on the shelf.

Advisor Service Agreements: The Weak Link

Today's blog post is provided, courtesy of Mr. Phil Chiricotti, President of the Center for Due Diligence. Since the topic of contract review as an important element of proper due diligence is one which I have addressed elsewhere on and in my articles and speeches, I asked Phil for permission to reprint his article and he kindly agreed.         

                                          Advisor Service Agreements: The Weak Link

Enormous attention has been centered on retirement plan fees in recent years, including the new 408(b)(2)disclosure requirements. The liability has also increased for those who fail to comply. Lost in this shuffle is the fact that fees are only one piece of the puzzle.

While a well drafted, reviewed and understood service agreement can help preclude errors and claims, the service agreement is also the primary defense against liability caused by service provider mistakes and negligence. In spite of this important role, many plan sponsors - particularly small plan sponsors - sign standard service agreements without adequate review or counsel.

In addition to agreeing to vague service agreements, some sponsors engage advisors without a service agreement or verification of insurance coverage and bonding. As noted many times, most small plan sponsors also lack first party fiduciary liability insurance. A combination of the aforementioned is nothing less than a nuclear accident waiting to happen.

The DOL's new regulations provide an increase in both fee disclosure and clarity for comparative shopping, but 408(b)(2) does not preclude the need for an equitable service agreement. In our minds, the service agreement remains a weak link in the advisor vetting process, particularly in the small plan market. Indeed, the service agreement may not even reflect what was discussed and/or negotiated during the vetting process.

As noted by many attorneys, ERISA's primary focus has been on regulating the relationship between plan sponsors and participants. Beyond prohibited transactions and prior to the DOL's new disclosure regulations, little guidance was provided on how to manage the relationship between sponsors and service providers, including those assuming a fiduciary role.

The courts have not spoken uniformly about recourse between the plan and outside fiduciaries, but the plan sponsor's supervisory role, or the lack of it, has come under intense scrutiny in recent years. Because errors and disputes are a fact of life, it is long past time for the service agreement to become an integral part of the advisor vetting process from the beginning.


Trust, Institutional Investors and Their Service Providers


Financial scandals, decimated 401(k) plans and significant fallout on Wall Street are only a few of the pain points that leave one longing for halcyon days of yore. There is a lot of talk about broken promises and attempts to regain client trust.

Even outside the financial services sector, long known for its reliance on interpersonal relationships, sellers are working hard to rekindle the love with their consumers. In "Corporations work to regain customers' trust" (September 18, 2009), Business Week reporters David Kiley and Burt Helm write that "In the world of branding, trust is the most perishable of assets." Adding to marketers' woes, recent polls suggest gross unhappiness with business in general, something that slick ads are unlikely to fix.

Closer to home, "Can You Trust Your Consultants and Service Providers? (Human Resources, October 2009) addresses the critical relationship between service providers and consultants and 401(k) plan fiduciaries. The article quotes Nixon Peabody attorney Sherwin Kaplan as saying that "trust with providers should be earned, not implied" and that sponsors must properly select and then monitor each vendor. Aside from the obvious problems associated with conflicts of interest and fees, Attorney Kaplan mentions new worries in the form of fiduciaries suing each other over questions about suitability and due diligence.

In yet another related item, uber venture capitalist Fred Wilson opines on "Ten Characteristics of Great Companies" (September 3, 2009) with attribute number 10 being that "Great companies put the customer/user first above any other priority." We concur absolutely but know that more than a few service providers are challenged to deliver above and beyond the call of the duty at the same time that sales and client relationship management budgets are being cut to (in some cases) unsustainable levels. 

In "Broker's World: Fiduciary-Like Process Could Become Voluntary" (September 23, 2009), Wall Street Journal reporter Annie Gasparro describes the inevitability of a national (U.S.) focus on new broker-dealer rules. Boston University law professor Tamar Frankel is quoted as saying that "If the clients can trust them, they won't have to do all the freebies like lunches to get their business."

As both a buyer and seller of services, I like to think that my perspective considers both sides of the aisle. In the spirit of open conversation, I've listed a few thoughts below. I welcome your comments.

  • Integrity (a precursor to building a relationship of trust) must be a core element of an organization's enterprise-wide culture.
  • Customer service does not have to deteriorate with budget cutbacks.
  • Discounting of fees does not necessarily translate into automatic trust, especially if it encourages a service provider to cut back on quality or lose money instead.
  • Clients should be willing to provide constructive feedback to service providers before calling it quits. A reasonable period of "remedy" should be decided upon before pulling the plug.
  • The compensation structure on both the buy and sell side should encourage long-term value maximization on behalf of relevant constituencies.
  • Conducting assessments as to what remains critically important to institutional investors versus "nice to have" or "waste of time" should occur on a regular basis.

It is undeniably a brave new world. Without trust and a focus on long-term relationship building, new business for investment service providers may end up costing a bundle. Instead of being hired to "rescue" institutional investors such as pensions, endowments and foundations by granting advice, an absence of trust could induce more risk in the form of litigation and harm to reputation, resulting in service providers themselves asking for a safety net.

Can Risk Management Be Deemed Strategic?


As a veteran risk manager, I was encouraged to read that risk management is starting to receive the attention that I've long advocated as mission critical. In "Risk becomes focus for trustees trying to rebound from crisis" (9/4/09), Pensions & Investments reporter Drew Carter writes that pension decision-makers are more than ready to confront the volatility beast. In particular, the goal now seems to be a choice between matching liabilities or "keeping many of the asset classes that burned them in the crisis." 

Risk management comes in many different forms. Ask a dozen retirement plan executives how they define risk and you are likely to get twelve different answers. In a way, that's part of the problem. For some, risk management might take the form of portfolio diversification via investing in absolute return strategies. For others, risk control could mean the creation of a dynamic hedging program. Which one is right?

Unfortunately, for those seeking a simple answer, there is no universal risk management panacea since every situation is different. Are there common best practices? Yes indeed and I could easily construct an optimal risk management program that embeds "must do" items versus "facts and circumstances" recommendations.

While I think we have a long way to go before risk management is front and center the way it should be, it is encouraging to know that risk is no longer a four-letter word, banished to the hinterlands of theory and geekdom. It would be grand if fiduciaries deemed effective risk management as a strategic advantage and not a burden. Good controls help to mitigate losses, sub-performance and lost opportunities. Robust risk management can also produce a goldmine of information that is otherwise unattainable unless one is carefully measuring what might go awry.


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.

Two Giants Merge - Que Pasa?

With the news of Towers Perrin and Watson Wyatt merging to form Towers Watson, tongues are wagging about what this means for the employee benefits consulting business in general. According to the June 28, 2009 press release, the all stock deal "will create one of the world's leading professional services firms."

The combination comes at an interesting time. Besides the economic rollercoaster we've been riding, there is a real debate about the role of consultants, particularly whether they will wear the hat of pension fiduciary, functional or otherwise. Additionally, many of the decisions that challenge pension executives are increasingly specialized, making it difficult for generalists to assist. Then there is the issue of fees and whether "traditional" firms can prosper as competition mounts. The offering of asset management services by select consultative organizations illustrates their respective desire to juice up revenue, despite the possible conflicts of interest that ensue.

Whether the Watson Wyatt - Towers Perrin deal is a harbinger of things to come remains to be seen. One thing is sure. The advice and consulting business is changing rapidly.

Tale of Woe for Major City Pension

In "Airline investment turns sour for pension boards," Free Detroit Press reporters Tina Lam and Jennifer Dixon chronicle what some may interpret as a parade of horribles. Intrigue enough for a Hollywood thriller but possibly too much excitement for plan participants, the case in point is a series of alleged faux pas. Besides alleged conflicts of interest, there are questions about suitability, liquidity, due diligence and other investment risks. I am quoted on the topic of key person risk, an issue that is far from trivial when control and monies are in the hands of a select few.

"Susan Mangiero, president of Pension Governance Inc. in Connecticut and author of a book on risk management for pension funds and endowments, said it's crucial to thoroughly investigate individuals involved in small private firms before a pension fund invests, since the managers' backgrounds and finances are critical to the firm's success.

"If a key player has a financial issue, or they're deeply in debt, how can they make good decisions about other people's money?" she said."

I did not comment about this particular situation but about concentration of power in general and the need for arms length negotiations (not to mention access to sufficient information).

New GAO Study About Conflicts of Interest and Impact on Retirement Plans

In his Congressional testimony, U.S. Government Accountability Office ("GAO") executive, Charles A. Jeszeck, describes a "statistical association between inadequate disclosure and lower investment returns." The stated premise is that pension consultants who fail to disclose  their conflicts of interest could cost defined benefit plans in excess of 100 basis points if or until the situation is corrected. Conflicts can take many forms, including, but not limited to, business relationships between pension consultants and broker-dealers that question whether pensions are getting the best execution possible.

Though the research focused on traditional plans, the GAO suggests that "participants could be more vulnerable to potential adverse effects of conflicts of interest in DC plans such as 401(k) plans." The report cites one study that showed that "36 percent of responding sponsors either did not know the fees being charged to participants or mistakenly thought no fees were charged at all." Revenue sharing arrangements remain a mystery for some while others are unaware of "hidden" fees.

As the world awaits final proposals from the U.S. Department of Labor about conflicts of interest and disclosures, one ponders - How much disclosure will truly help save the day in terms of minimizing conflicts of interest that otherwise weaken the bond of trust between a plan sponsor and its service providers as well as the relationship between plan participants and sponsor?

Editor's Note:  See "Testimony Before the Subcommittee on Health, Employment, Labor and Pensions, Education and Labor Committee, House of Representatives: Private Pensions - Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans" by Charles A. Jeszeck, Acting Director, Education, Workforce and Income Security, March 24, 2009.

Will Wall Street Layoffs Hurt Service for Pension Clients?

According to "Pink slips on Wall Street" by staff (February 23, 2009), there are going to be a lot of empty chairs in service provider land. The number of individuals being laid off, redirected or otherwise allocated to different duties is staggering. This begs some important questions.

  • Will those individuals who remain employed by banks, law firms, consultancies and so on be able to handle the work that erstwhile colleagues heretofore addressed?
  • Will the sell side feel even more pressure to close deals and will that in turn create heightened discomfort on the part of pension buyers?
  • Will the stress of imminent layoffs demoralize some professionals enough to discourage them from doing the best job possible (if they think they will be out of a job soon or unlikely to be rewarded for going the extra mile for clients)?
  • Will shrinking staffs (plan sponsors and service providers alike) cause people to take shortcuts? After all, we only get twenty-four of them every day. Time is a binding constraint, especially when "to do" lists are growing exponentially. New accounting rules and regulations only add to everyone's work.
  • If short cuts occur, isn't fiduciary liability exposure for everyone involved likely to rise because there is an increased probability that some risks will be ignored or improperly managed?
  • Could a nasty spiral ensue wherein untended risks create undue exposures, possibly leading to litigation and/or regulatory enforcement which in turn consumes time, money and energy, thereby reducing available hours to carry out prudent policies and procedures?

Things are really tough right now. However, the reality remains. Never a good idea to shirk from investment best practices, new challenges arguably demand even more of a commitment to problem-solving. How many people do you know who go home at 5 pm any more? Work is becoming a 24/7 commitment, especially as supporting resources become scarce.

Fundfire Q&A About Consultant's In-House Products

A few days ago, I was asked to provide an answer to a FundFire reader's question regarding possible conflicts of interest. I've included the question and published answer below. (See "Your Q&A: How to Vet Consultant's In-House Products?" by Dr. Susan Mangiero and Mr. Wayne Miller,, August 25, 2008.)

"Question: What can an institutional investor do to protect against conflicts of interest if a consultant recommends an in-house investment product? Third-Party Marketer, Institutional, East Coast

Answer: When reviewing an investment in a consultant’s in-house product, the plan sponsor decision-makers should first and foremost review their own fiduciary duties to participants (ideally with plan counsel) and the implications that such a selection would have on those obligations. Without a full understanding of such obligations, it is impossible to know when, how and why a fiduciary breach might occur. In the event that the consulting firm contracts as a fiduciary to the pension plan, the plan sponsor should likewise seek counsel regarding any implications for asset allocation and money manager recommendations made by the consultant.

Notwithstanding the important fiduciary considerations, it is vital to understand the process by which the consultant arrives at recommending one of its own offerings. Countless questions arise. Will the consultant earn higher fees by recommending an in-house fund? Are those higher fees justified? Is the in-house offering 'suitable' on a risk-adjusted basis? Are there 'better' available investment choices offered by third parties?

It’s important to clarify whether the consultant will be able to objectively fire an in-house or outsourced manager if performance is ever deemed sub-par. An institution must also determine whether the consultant is displaying full transparency about the selection, monitoring and termination process within the offering. Always remember that a plan sponsor must be able to discern the line of demarcation between authentic fiduciary representation by the consultant and the consultant’s own self-interest. Delegation does not eliminate the need for continued oversight on the part of the plan sponsor fiduciaries."

Editor's Note: For further reading, check out the following resources.

Pension Consultants: Frenemies or Friends?

Back from speaking about hedge funds to a large investment fiduciary audience, I've had some time to reflect on the many topics discussed during this sold-out FI360 conference. I keep thinking about one session in particular. 

Focused on the role of the Investment Committee, a panel of veteran institutional investors and service providers waxed poetic about trustee selection, fees and the use of third parties. In response to a question about how to benchmark the performance of pension consultants, one panelist offered that seeking legal redress (in the event of a major problem) would make it difficult (perhaps impossible) to get sufficient responses to any future Request for Proposal ("RFP"). Other consultants, scared by a lawsuit against a peer, would shun the pension plan plaintiff. 

Did the speaker mean to say that a pension fund should avoid rocking the boat with a consultant if, by doing so, they limit the universe of potential service providers for the next bidding round? More broadly, what is the optimal role of the investment consultant? How should a pension plan explicitly grade whether a consultant is doing a "good" job in terms of providing services such as those listed below: 

  • actuarial analysis
  • strategic asset allocation
  • selection and ongoing review of money managers
  • fee due diligence
  • financial risk management?

If a consultant signs on the dotted line as a fiduciary, are they frenemies or friends of the pension plan? How are their interests aligned as a result?

Ideally, service providers offer independent, objective information with the plan's participants interests in mind.

Investment Consultants and Time Perspective


I'm a big believer that we can learn from a variety of decision-makers. So it is with appreciation (and the proverbial hat tip) to Robert Elder for pointing out comments made by Frederick "Shad" Rowe, chairman of the Texas Pension Review Board. Robert pens an interesting Texas-centric blog called "Public Capital" and draws attention to Rowe's April 11, 2008 criticism of investment time travel that emphasizes past performance.

Recounting a Wayne Gretzky quote that "he skated not to where the puck was, but where it was going to be," Rowe excoriates investment consultants who "lead their clients not to where the puck is going to be or even where it is now, but instead to where it was three years ago." A 35-year investment veteran, Rowe further suggests that pension trustees are unwise to eschew long-term oriented investing in favor of strategies du jour such as (his words) "so-called 'alternative' investments, including private equity, where investment consultants are attempting to reduce what they call 'risk' and patching together a crazy quilt of 'uncorrelated' assets." Regarding commodities, he offers that the markets are too small to absorb the billions of dollars being thrown their way. Not a fan of international currency plays, Rowe thinks that pressure on the U.S. dollar will likely worsen economic conditions stateside. He urges pensions to think twice before investing in activism strategies that ignore company fundamentals.

Click to read Rowe's comments in their entirety. (In the spirit of encouraging productive debate, this blog welcomes comments from investment consultants about time orientation.)

Editor's Note: According to their website, the Texas Pension Review Board is "mandated to oversee all Texas public retirement systems, both state and local, in regard to their actuarial soundness and compliance with state law." Interestingly, there is a section about how the board is appointed. Worth reading, it is a rare example of documented experiential requirements. In this case, three of nine board members must have "experience in the field of securities investment, pension administration, or pension law." The board must also consist of an actuary, someone with "experience in governmental finance" and "a contributing member of a public retirement system."

Can Banks and Pension Clients be Friends When It Comes to Valuation?

In his November 11, 2007 blog entry, New York Times reporter Floyd Norris describes an interesting tidbit of information, tucked inside the just filed 10-Q by Wachovia Corporation. On page 27, it reads "In the third quarter of 2007, we purchased and placed in our available for sale portfolion $1.1 billion of asset-backed commercial paper from Evergreen money market funds, which we manage. We recorded a $40 million valuation loss on this purchase, which is included in our market disruption-related losses." As Norris explains, while the regulatory filing adds that Wachovia is "not required by contract to purchase these or any other assets from the Evergreen funds" they manage, a loss of that magnitude would "break the buck." When the $1 Net Asset Value typically associated with a money market fund no longer prevails, Wachovia or any other financial institution in a similar position is arguably obliged to stem the financial tide or risk loss of investors or worse. Click here to access the 10Q report.

In today's article entitled "SEI, Rival Money Funds Go on Offense to Avoid 'Breaking the Buck'," Wall Street Journal reporters Diya Gullapalli and Tom Lauricella write that money manager SEI Investments has said "it would provide financial guarantees for some of the funds' holdings of SIVs." CEO Alfred West explains the rationale for voluntarily providing credit support, in the aftermath of a threatened downgrade of SIV Cheyne Finance, LLC paper. Held by several SEI funds, "managed for SEI by Columbia Management, the money-management arm of Bank of America Corp," the funds' rating could likewise be compromised. Click here to listen to the recorded November 12, 2007 presentation to SEI investors. 

A recent IMF presentation, entitled "Regional Economic Outlook - Europe" stresses the importance of improving "risk assessment models, market and liquidity risk management, due diligence, and transparency regarding the loan origination process and counterparty risk exposure."

Color me confused. Haven't many banks held themselves out to be leaders in the area of risk control? What about the fact that banks are highly regulated? Doesn't that contribute to good oversight? What is the role of Basel II, looming right around the corner and meant to reflect robust risk management activities on the part of banks in the U.S. and abroad?

For those banks with pension clients, what is the process in place to vet all recommended money market funds, including their own? Is the process conflict-free? Conversely, are pension funds directly (or through pension consultants) asking sufficient questions about the safety of recommended short-term capital pools?

As the mysteries unfold, don't be surprised what we learn about the importance of good fund selection and risk review process.

Note: Wikipedia defines a structured investment vehicle as "an evergreen credit arbitrage fund, similar to a CDO or Conduit. They are usually from around $1bn to $30bn in size and invest in a range of asset-backed securities, as well as some financial corporate bonds. An SIV is formed to make profits from the difference between the short term borrowing rate and long term returns." Click here for more information.

Can Pension Clients be Hazardous to Your Financial Health?

The following is an excerpt from an article written by Dr. Susan M. Mangiero and published in Mann on Wall Street (August 2007 issue). If you would like to receive a copy of the full text article, click here to send an email request.

<<Despite a recent study that all is okay in corporate pension land, changes are taking place to indicate otherwise. Preparing for lots of pension buy-out business, investment banks hire actuaries in droves. Swap trading desks similarly staff, anticipating a surge in liability-driven investing. CPA firms scurry to find qualified professionals who can handle the alphabet soup of new accounting rules. Even those who breathed a sigh of relief with the final enactment of the Pension Protection Act of 2006 (“the suspense is over”) acknowledge the beginning of the end of “the way things were.” Board members, CEOs and CFOs wait for the other shoe to drop, assuming that the sequel to FAS 158 will compel wide swings in earnings. Congress and regulatory agencies busy themselves with a flurry of investigations. On top of everything else, longevity is forcing plan sponsors to rethink how to cut costs without alienating productive workers. The only constant is change. For traders who embrace volatility, life is good. For those in search of stability, hang onto your hats.

With all of this tumult underway, a little noticed trend seems to be emerging that could make pension clients high risk for service providers - asset managers, brokers, bankers, administrators, custodians, advisors, consultants, auditors and ERISA counsel. At its simplest, there is a real question as to who has investment fiduciary responsibilities other than the plan sponsor. Some organizations wear the hat of “fiduciary” but charge steep fees to compensate for added liability exposure. Others disavow the role, going so far as to include text to that effect in their engagement letter. However, real questions remain. Will judges uphold the legitimacy of this stance or instead classify a service provider as a functional fiduciary against their will, thereby opening the door to claims of breach? If that occurs, asset managers, consultants and other persons peripheral to a plan sponsor get the worst possible outcome – increased liability exposure without compensation.>>

Down by the Bayou (Hedge Fund), Judge Says Too Bad

Alleging breach of fiduciary duty, plaintiff South Cherry Street, LLC cited failure of consulting firm Hennessee Group to do proper due diligence of the now defunct hedge fund, Bayou Group. In response, federal judge Colleen McMahon "granted a defense motion to dismiss the case, finding that Hennessee wasn't alone in being duped by Bayou." (Click here to read the August 3, 2007 Reuters article.)

As several related cases make their way through the courts, pay attention to how the judge rules. Some experts suggest that institutions could be asked to assume more responsibility for the investments they make, even after hiring a consultant.

If true, things are likely to change. After all, why hire someone else if ultimate responsibility stays with the plan sponsor? The import is considerable. Trustees and other internal fiduciaries who now look to outside experts will have to become more expert themselves. (We've long advocated for better fiduciary training and selection standards, whether an outside firm is employed or not. Click here to read a recent blog post on the topic.)

Consulting Firm Pays $2.75 Million for Hedge Fund Recommendation

According to money management letter (April 9, 2007 issue), Rocaton Investment Advisors paid $2.75 million to the San Diego County Employees Retirement Association "for recommending Amaranth Advisors." The article also goes on to say that no information is forthcoming about whether Rocaton did anything wrong and whether this money is covered by professional liability insurance.

The reason for citing this article is not to put any one particular firm in the spotlight but rather to suggest that pension fiduciaries check with their appropriate counsel and do sufficient homework internally to make sure that everything that should be done is being done. This includes, but is not limited to, seeking answers to the following questions:

1. How much experience does a particular consultant and/or financial advisor under consideration have with respect to examining hedge funds or fund of funds?

2. Does the consultant and/or financial advisor have an adequate understanding of the hedge fund or fund of funds' use of leverage through short-selling and/or use of derivatives, if relevant? What is their systematic process for examination of leverage? How do they define leverage and does that comport with industry norms?

3. Has the consultant and/or financial advisor identified (and explained to plan sponsors) possible risk factors associated with a given hedge fund or fund of funds? Sector concentration, management style, specific ownership structure of the limited liability company or partnership, availability of risk analytics, stop loss triggers, primary and secondary plans for liquidation, valuation policy, redemption restrictions and use of side pockets are JUST the beginning.

We'll talk much more about the issue of investment risk review in coming days. Why? Plan sponsors are still on the hook for monitoring their monitors. It's simply not as easy as passing along a hot potato regarding due diligence to someone else.

P.S. There is a rumor that another pension consultant has offered recompense in conjunction with this hedge fund case. If true, could this be a trend in going after consultants and/or financial advisors in the event of losses?





Fidelity Abandons its Traditional Plan

According to its May 12, 2006 press release, Fidelity Investments expands its offering to deliver "defined benefit plan sponsors increased investment flexibility and greater access to and control of plan data to help them identify and mitigate financial and fiduciary risks."

In today's Investment News, reporter Kathie O'Donnell writes that Fidelity Investments will replace its traditional pension plan for over 30,000 participants and instead offer them a "retiree health reimbursement plan and a beefed up profit-sharing plan." O'Donnell adds that Fidelity's in-house studies suggest the need to address the health care gap, the company match will increase to 7% from 5% and profit-sharing contributions will continue.

For some reason, today's headline stood out, causing me to wonder. Might it make sense to ask pension advisors, consultants and money managers what plan(s) they offer to their employees and why?

New Pension Risk Management Survey Launched

News ReleaseContact:Kim McKeown
For Immediate ReleaseMarketing/PR Program Manager
March 22, 2007847-706-3528 (

New Survey Looks at Pension Risk Management and Impact on Funding Gap

Pension Governance, LLC and the Society of Actuaries (SOA) are proud to join forces to research current pension risk management practices. In what is believed to be a unique large-scale assessment of this critical topic area since research was done in 1998, the jointly developed survey investigates the use of derivatives and related risk and valuation policies by pension funds and their external money managers. Questions address other topics such as the role of the pension consultant, involvement of the plan actuary, new pension rules and regulations and an increased emphasis on enterprise risk management.

Global growth in futures, options and swaps dwarfs all other financial markets. According to the Bank for International Settlements, over-the-counter and exchange-traded derivatives market activity in 2006 grew to more than $400 trillion. Public and private pension plans, a second giant force, control over $10 trillion in assets. Their risk management decisions affect millions of people around the world, compelling the need to understand pension risk management as never before.

Different than even a few years ago, markets are now more volatile, increased longevity is worsening the funding gap and pension fiduciaries seek higher returns in the form of hedge funds, private equity investments and portable alpha strategies, all of which frequently involve derivative instruments. Derivatives show up in countless liability-driven investing strategies as well, making it impossible to ignore their economic impact.

Adding to the complexity of the investment decision-making process, board members, policy-makers, taxpayers, shareholders, actuaries, fiduciary liability underwriters, debt rating analysts and plan participants need and want to understand what fiduciaries are doing in the area of pension risk management. Unfortunately, a dearth of information about plan sponsors and their money managers makes it extremely difficult to head off trouble before it starts. The primary goal of this survey is to make it easier for relevant parties to identify existing risk control practices and, by extension, encourage a long overdue discussion about best practices. While this survey emphasizes defined benefit plans, risk management applies to defined contribution plans as well. When financial controls are absent or implemented poorly, fiduciaries are unable to select appropriate 401(k) investments and evaluate service providers’ fees, possibly leaving themselves exposed to lawsuits.

Author of Risk Management for Pensions, Endowments and Foundations, Dr. Susan M. Mangiero, CFA, FRM, Accredited Valuation Analyst, Accredited Investment Fiduciary Analyst and her team are responsible for survey design and statistical analysis with ongoing input from an oversight group of pension professionals assembled by the SOA. According to SOA Research Actuary Steve Siegel, "we are all very excited about the prospect of providing our members invaluable insight about this important area.”

Invitations have been sent to nearly 6,000 pension fiduciaries in the United States and Canada. Interested plan sponsors who have not received an invitation are encouraged to participate by contacting either Dr. Susan M. Mangiero at 203-261-5519 or or Steve Siegel at 847-706-3578 or

Participation is limited to plan sponsors only. Preliminary results will be released to attendees of the SOA's Investment Symposium in New York, April 18-20.

Pension Consultants and Hedge Funds

In "Retirement funds fear untested consultants" (HFM Week, August 17-30, 2006), Jefferson Wells engagement manager Aileen Doherty describes a need for independent hedge fund valuations and a concern that pension consultants may not be doing as much as possible to vet valuation issues. Attorney Doherty adds that "There is going to be more pressure on pension funds to make sure the managers they hire are doing what they are supposed to be doing", especially at a time when "Pressure from the SEC and individual states is growing."

In the same article, Wilmer Hale partner Alexandra Poe asserts the need for "trustworthy third party valuations", adding that pension fund trustees "may feel they have hired consultants to get to the bottom of it, and they may feel underserved."

Any pension consultant who wishes to comment has an open invitation from this blog to offer your perspective. The same invitation extends to investors. Please be reminded that we do not endorse any particular firm for any type of product or service. We would simply be acting as a communication conduit.

As I've written before, valuation is a cornerstone of a hedge fund's activities, including, but not limited to, asset allocation, trading, risk management, performance reporting, compliance and auditing.

A point which CANNOT be emphasized enough is the need for independence and objectivity. Regulatory bodies such as the IRS and various courts continue to emphasize specialized valuation training and designations. This applies regardless of purpose - rendering an opinion of value of a particular position or portfolio, assessment of the economic interest of a hedge fund partner or the business itself (such as when a new person exits or enters, key person insurance, divorce) and/or a review of the process employed by organizations providing valuation numbers.

As an Accredited Valuation Analyst, I have written extensively about valuation issues. Please email if you want a copy of any or all of these items:

1. Chart that describes various valuation designations
2. Aforementioned article
3. Hedge fund valuation panel transcript from earlier this year

In case you missed these items, these links may be of interest.

"Hedge Fund Valuation is a Big Deal for Pension Fiduciaries"

"Do You Really Know the Value of Your Portfolio?"

"Hedge Fund Valuation: What Pension Fiduciaries Need to Know" (Source: Journal of Compensation and Benefits, July/August 2006)