Pension Blog Turns 11 On Same Day As National Fiduciary Day

Last year, I celebrated a decade of posting investment governance insights to Pension Risk Matters. This year, I have two reasons to say "hooray." March 23 marks the eleventh year of posting analyses, research updates and essays about managing money, retirement planning and mitigating uncertainty. In addition, it is the debut of National Fiduciary Day. Sponsored by Fi360, the goal is to encourage individuals to be good stewards of other people's money. 

Given our shared commitment to investment fiduciary best practices and the fact that I am certified by Fi360 as an Accredited Investment Fiduciary Analyst, I asked the organization's top officers for their thoughts on this special day. They were kind enough to oblige.

Executive Chairman Blaine Aikin says "Happy Anniversary, Susan! Congratulations on having achieved 11 highly productive years of blogging. It's only fitting that this comes on Fi360's National Fiduciary Day. Keep up the great work and thank you for your valuable contributions to the profession!" Fi360 Director J. Richard Lynch adds "We have appreciated our long standing relationship with Susan as an AIFA designee and in particular, her contributions to the fiduciary discussion through her blog and as a past speaker at our annual conference."

There are lots of us who long ago recognized the importance of perturbing the conversation about investment governance. This includes the roughly 1.2 million visitors to Pension Risk Matters, many of whom have not been shy about offering their views. I am grateful to them all and look forward to a continued exchange of ideas.

Investment Policy Statements and Trading Authority

For those who are unaware, I created an investment compliance and risk management blog a few years ago called Good Risk Governance Pays®. Although I mostly provide insights that are unique to each website, from time to time I do repeat an entry if it makes sense. In the spirit of providing educational write-ups about topics that are important to all types of institutional investors, I invite readers of Pension Risk Matters® to check out "Trading Ahead of Investment Policies and Procedures" and to sign up for email notices when new items have been added to the Good Risk Governance Pays® blog. This February 1, 2017 entry addresses the advantages of having guidelines such as an Investment Policy Statement. Otherwise, it could be challenging to detect rogue trading.

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!

Educational Webinar About Pension Risk Management

Please join Dr. Susan Mangiero on November 2, 2016 for a one hour online program about pension risk management. The webinar is sponsored by the Professional Risk Managers’ International Association (“PRMIA“) in recognition of the importance of the subject. This learning event qualifies for one Continuing Professional Education (“CPE”) credit.

A program description is shown below. You can register by clicking here. If you have specific questions ahead of November 2, please call 1-612-605-5370 and ask to speak to someone in Learning and Development.

Program Overview: According to estimates, global retirement assets are huge at $500 trillion. Improper decision-making about plan design, investment and risk mitigation could have an adverse impact on millions of individuals to include employees, retirees, taxpayers and shareholders. Service providers such as asset managers, banks and insurance companies are likewise impacted by bad governance and unchecked risk-taking. Everyone has a stake in the financial health of the worldwide retirement system and whether uncertainty is being adequately identified, measured, managed and monitored, especially now. New regulations, a flurry of fiduciary breach lawsuits, low interest rates, the complexity of modeling longevity, increased risk-taking, need for liquidity, cost of capital and worker mobility are just a few of the challenges that keep retirement plan executives, participants and their advisors up at night.

This one hour webinar will present an overview of retirement plan risk management to include the following:

  • Description of economic and regulatory trends that influence retirement plan management liability and asset decisions;
  • Discussion about retirement plan risk-taking, fiduciary liability and increased need for effective risk management protocols;
  • Explanation of different categories of retirement plan risks;
  • Discussion about the interrelationships of different categories of retirement plan risks; and
  • What can be done, process-wise, to establish and maintain an effective retirement plan risk management program.

Improving the RFP Process

A few months ago I was asked to complete a Request for Information ("RFI") by the sponsor of a large pension plan. Their goal was to hire an independent outside party to vet the investment management policies and procedures of its outsourced manager. I've long maintained that it is an excellent idea to have someone review operations and render a second opinion about how asset managers perform relative to a retirement plan's objectives, how much risk is being taken to generate returns, the extent to which the asset manager is mitigating risks and much more.

While this type of "kick the tires" engagement is not as common as many think it should be, that could change quickly. The Outsourced Chief Investment Officer ("OCIO") business model (sometimes referred to as the Delegated Investment Management or Fiduciary Management approach) is rapidly growing at the same time that recent mandates such as the U.S. Department of Labor's Fiduciary Rule, along with a flurry of lawsuits that allege breach, call more attention to how in-house plan fiduciaries hire and monitor their vendors.

Given the relative newness of this type of engagement and the fact that a review can mean different things to different people, I strongly recommend that the hiring party consider how much work they want done and what budget applies. In the case of the aforementioned invitation to submit a work plan and detailed budget, my colleagues and I were told by the plan sponsor they weren't really sure what should be done. Our suggestion was to carry out a preliminary review of existing policies, procedures and operations, report the findings to the trustees and then discuss what could be done as a subsequent and more granular assessment, if needed. This would get the ball rolling in terms of identifying urgent concerns and avoid having to write a big check. Even with an opportunity to ask questions of the hiring plan, there were still many unknowns. For example, would the plan sponsor be willing to pay for a complete investigation of items such as vendor's data security measures, adherence to its compliance manual, growth plans, risk management stance, employee personal trading safeguards, measures to avoid conflicts of interest, business strength, type of liability insurance in place and verification (if true) that back office cash management was separate from trading or instead have an examiner concentrate on a subset? When the plan sponsor said it wanted to have an outside reviewer look at historical investment performance numbers, was its goal to assess data frequently or over a longer period of time, relative to a selected benchmark, relative to an asset-liability management hurdle, based on risk per return units and so on?

Anyone who has reviewed bid documents from public and corporate plan sponsors will likely conclude that there is not much consistency, especially for due diligence and governance assignments. That's not ideal. Yes, it's true that facts and circumstances will differ but clarity in terms of what a hiring plan wants can be a plus for everyone. I think it would likewise be helpful for the bid document to state a budget number or "not to exceed" range and let the respondents suggest what work could be reasonably done for that fee. Both the buyer and seller would know at the outset whether it makes sense to proceed with discussions. Another way to go would have the plan sponsor hire someone to interview its in-house fiduciaries, identify and rank their major concerns and then use that information to create a structured Request for Information or Request for Proposal ("RFP") that would be distributed to potential review firms. This exercise would entail a short-run expense but could save money in the long-run by ensuring that the plan sponsor and the review team are in sync about expectations and deliverables.

The bidding process is often a tough one for both buyer and seller. In 2015, I interviewed the co-CEO of a company called InHub, Mr. Kent Costello. I have no economic connection with this company. I had asked for a demo after reading about the use of technology to help fiduciaries with their search and hiring of third parties. In answer to my question about the limitations of the existing RFP process for the buyer, Kent said "It can be difficult for investment committees to put together a list of questions that will help them to effectively compare firms and service offerings ... Poorly crafted, irrelevant, or repetitive questions will lead to a weak due diligence process and leave the committee confused and frustrated. Worse yet, it could mean the selection of an inadequate vendor." Just as important, he pointed out that sellers could be reluctant to take the time and money to prepare a detailed proposal, "given the low likelihood of winning the business..." Click to read "Electronic RFP Process and Fiduciary Duty."

Process improvement is always a plus, whether applied to crafting a bid document, responding with a proposal or implementing the work, once hired.

Company Worries About Retirement Readiness

According to a new report from Willis Towers Watson, corporations worry that employees cannot afford to leave the labor force on schedule. Fearing higher costs, many employers describe anemic retirement readiness as a "top risk" yet few monitor this on a regular basis. Researchers write "These findings suggest that sponsors have an opportunity to improve the governance of DC plans by increasing the frequency with which they monitor retirement readiness, as specific metrics on readiness would offer sponsors insight on the overall effectiveness of their plan." For a full read of this report, click to download "Unlocking Value From Effective Retirement Plan Governance."

Unfortunately, if results of a new FINRA Investor Education Foundation study reflect widespread reality, Corporate America may have an uphill and expensive battle on their hands. Nearly eighty percent of respondents self-identified as financially literate despite low scores on a quiz they took to test their knowledge. Making matters worse, financial education is a rarity. Six out of ten persons answered "No" when asked "Was financial education offered by a school or college you attended, or a workplace where you were employed?" 

Notably, the 2015 National Financial Capability Study reveals a financial literacy income gap with persons earning less money seemingly in need of greater help. If, as some predict, the U.S. Department of Labor Fiduciary Rule makes it harder for smaller investors to access financial advice, employers may need to pick up the slack. If that occurs, expect companies in search of long-term labor cost savings to incur bigger short-term cash outflows to provide employees with adequate financial education (to the extent allowed).

The takeaway is that retirement plans have a bottom line impact on shareholders. Companies offer programs to attract and retain talent but are mindful of the cost-benefit tradeoff.

More About the Fiduciary Gap

Thanks to the many people who shared their insights about various state retirement arrangements for eligible private company employees and the need for a proverbial umbrella to address the fiduciary gap.

Let me start with the Nutmeg State program since I discussed it in two earlier posts. Interested parties can click to download the final legislation that sets up the Connecticut Retirement Security Exchange. (Note the new name.) Several changes caught my eye.

  • On page 156 of 298, there is a provision that "If a participant does not affirmatively select a specific vendor or investment option within the program, such participant's contribution shall be invested in an age-appropriate target date fund that most closely matches the participant's normal retirement age, rotationally assigned by the program." If "rotationally" means "random," it will be helpful to know how board members identify age cohorts and select (and monitor thereafter) a particular product for each group.
  • Regarding a provision that allows the sitting governor to individually select the board chair without the advice and consent of the General Assembly, a best practice is that the engagement process be transparent. Interested parties want to know that the appointment reflects the right person for the job
  • It would be helpful to know the basis for why the voluntary opt-in for small businesses with more than five employees was removed. After all, forced regulation could end up costing firms so much in terms of paperwork and payroll set-up that hiring plans are put on hold.
  • It would be helpful to know how the three percent default contribution level will be tracked so that legislators will know whether to seek an increase later on. It's a low number, especially given the math for what can be done privately. Suppose a person makes $50,000 per year in wages. The three percent deduction translates into $1,500. In 2016, the IRA contribution limit for someone younger than fifty years is $5,500. Should an individual decide to allocate the maximum, participation in the state program will logically require that the individual go elsewhere to invest the additional $4,000. Why doesn't that individual simply invest the full $5,500 with one reputable organization? I assume the counter argument is that an individual who would not max the annual IRA limit needs a nudge in the form of the state program.

As I wrote in "State Retirement Arrangements for Small Business Employees," there are multiple state endeavors and one would need to examine the details of each one to assess economic impact and pension governance implications. Questions about federal programs exist as well. Putting aside dire long-term projections about the U.S. Social Security Trust Fund, absent reforms, several critics are unhappy with what they see as a fiduciary gap for anyone enrolled in the myRA program. By way of background, there are no fees to the individual enrollee. This is good but the guaranteed return is low because it is tied to federal debt security yields. For June 2016, the number is 1.875 percent APR. There is a lifetime maximum of $15,000 for eligible persons. A person's employer must agree to facilitate automatic deductions which means you must be employed.

One attorney I called today said he did not think there is a fiduciary in place for this federal product. Chris Carosa, editor of Fiduciary News, has another take. In "Does "myRA breach fiduciary duty?" he lays out reasons why he thinks the myRA product is "blatantly ill-suited for retirement savers." He decries the "oozing irony" of political leaders who want the Fiduciary Rule applied to others but not to themselves, adding there is no diversification potential and the selling firm (i.e. the U.S. Treasury) is conflicted by distributing its own product. Another retirement industry professional wants to know "What fiduciary would MANDATE that a twenty-five year old invest his or her retirement assets in a short to intermediate term government bond fund and expect to avoid liability?

You get the picture. We need to understand where the fiduciary gaps exist and then strive to close them as quickly and efficaciously as possible.

Pension Risk Matters Blog Turns Ten Years Old

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

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

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

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

Fiduciary Rule: Instant Gratification or Panic

If you haven't viewed Tim Urban's TED Talk about procrastination, I urge you to do so when you have a short break. He spins a tale of prioritization woe by referencing different parts of our brain. There is the Instant Gratification Monkey who tries to lure the Rational Decision-Maker from productive endeavors. This playful little fella holds sway until deadlines force the appearance of the Panic Monster. Someone then responds by pulling an all-nighter or two until the next crisis. As this illustrator and Wait But Why blog site co-founder explains, it's not an enjoyable way to manage tasks and seldom generates good results. It is far better to prepare in advance and schedule "must do items" accordingly.

Occasionally, planning ahead is difficult. Other times, it is easy. As Mr. Urban illustrates during his fifteen minute "eat your peas" presentation, there are signposts that indicate when acceleration is required. In his case, it was the appearance of his photo and bio in a TED Talks program that gave a date certain he could not ignore. For investment professionals who anticipate the eventual passage of the U.S. Department of Labor Conflict of Interest Proposed Rule into law, it is clear that significant change is afoot. Even if the exact final language or timing is unknown today, fiduciaries (now and later) may not want to sit back and wait.

Already there is talk of increased delegation to organizations that are willing to serve as either an ERISA 3(21) or 3(38) fiduciary, acknowledging that nothing eliminates risk completely. As Pension Resource Institute CEO Jason Roberts opines in an Investment News interview, "...while these offerings can limit fiduciary responsibility for advisers at the plan level, advisers could still be exposed at the participant level."

Others advance the idea that the so-called fiduciary rule will catalyze creative problem-solving, especially in the technology area, and that smart money is on first movers. See "Fiduciary Rule May Spur Product Innovation" by Andrew Welsch (Financial Planning, March 16, 2016). If you missed my earlier posts on this topic, see "Retirement FinTech Gets Another Suitor - Goldman Sachs" and "Financial Technology and the Fiduciary Rule."

Whatever path is decided on will require a minimum amount of time for contracting and setting up operations. Starting late could be costly for everyone involved. Lest you figure out a way to be able to succumb to the Instant Gratification Monkey (unlikely in the case of regulations and rules that require sufficient compliance), now is a good time for procrastinators to address priorities. Expending time right away may not be fun but is nonetheless necessary.

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.

Chief Retirement Officer and a Seat at the Table

Credit to retirement industry executive Steff C. Chalk for his article entitled "The Advent of the Chief Retirement Officer" and to senior ERISA attorney Steve Rosenberg for sharing his insights on his blog. The notion that a C-suite executive (or a government equivalent position) should be installed to oversee all things related to benefit plans merits consideration, especially if a plan's fiduciaries are short on time and/or expertise or have a conflict of interest.

According to Mr. Chalk, another advantage is that the Chief Retirement Officer ("CRO") can negotiate vendor contracts "for the prudent oversight of fees, services and all plan related expenses." He references ERISA litigation in his mention of a "professional purchaser." Attorney Rosenberg is more emphatic when he writes that those cases that make it to summary judgment often unpeel the fiduciary breach onion to reveal actions that were taken "with limited discussion, limited knowledge and with a limited investment of time." (As an aside, and from my perspective as an expert witness who has worked on both plaintiff and defense cases, there are lots of situations where fiduciaries have acted with care and diligence. Facts and circumstances must be thoroughly evaluated.) 

The challenge - and I think it is a big one - is to find someone who possesses knowledge and experience in a variety of areas such as law, Human Resource strategy, investment management and governance. Then there is a question about reporting lines. Should a CRO properly report to the Board of Directors (or in the case of a government fund, report to the Mayor or Governor)?

Regarding compensation, Mr. Chalk asks whether linking a CRO's pay to performance makes sense. His suggestion is that an appropriate performance metric be something that reflects retirement readiness of plan participants. At first blush, this sounds good but could be called into question if exogenous factors make it hard for a CRO to deliver. Factors such as family circumstances, age, risk tolerance and education can drive seemingly inappropriate retirement investment decisions made by individuals even when copious education has been provided by a sponsor to defined contribution participants. For a defined benefit plan, what if an actuary or consultant provides misleading information (such as lowballing lifespan) and a sponsor discovers down the road that participant benefits are at risk? Is it right to tag the Chief Retirement Officer with that mistake?

Something not addressed by either gentleman but near and dear to my heart is the idea that retirement plans should be overseen by the Chief Risk Officer (if one exists at an organization) as part of enterprise risk management. Headlines are replete with news about the adverse impact on the sponsor, whether corporate or government, when there are problems associated with one or more retirement plans offered by the employer. Capital may become more expensive, if available at all. There could be a liquidity crisis that soaks up cash that would otherwise be used to invest in shareholder wealth creation or provide municipal services. Reputation risk could increase. Costly litigation may follow. The diminution of employee benefits could lead to a loss of talented staff or make it hard to attract new workers. I have written and spoken about this interconnectivity at length. Links to a few of my articles are provided below:

With an expectation of "when" and not "if" an enhanced fiduciary standard will get passed into law, a discussion about the advantages of hiring a Chief Retirement Officer are timely. 

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.

ERISA Plan Investment Committee Governance

Following up on the theme I discussed about investment committee dynamics in "Decision Making When You Don't Like Your Colleagues" (September 9, 2014), Strafford Publications is sponsoring a related webinar. Entitled "ERISA Plan Investment Committee Governance," this November 17 2014 continuing legal education event will address oversight and management issues from multiple perspectives. If you are interested in attending as my guest, the first ten people who email will be registered on a no-fee basis. If you have questions for the panelists, letting us know in advance will be helpful.

Speakers are Dr. Susan Mangiero (Managing Director - Fiduciary Leadership, LLC), Ms. Rhonda Prussack (Vice President and Fiduciary Liability Product Manager - Berkshire Hathaway Specialty Insurance) and Attorney Richard Siegel (Alston & Bird LLP).

The panel will answer questions such as the following:

  • How important is investment committee governance?
  • How best must plan sponsors vet fiduciary risks when selecting an investment committee?
  • What is the role of ERISA fiduciary liability insurance?
  • What litigation techniques can be implemented to minimize the likelihood of a finding of breach of fiduciary duty by an investment committee?

Join us if you can. Click here to learn more.

Decision Making When You Don't Like Your Colleagues

As an independent economic consultant, I am fortunate to have flexibility as to project selection and the make-up of my team. From what I hear from colleagues, others don't feel as lucky. They tell me they feel stuck in a situation where they have important duties to carry out but do not necessarily trust or like their work mates. This could be dangerous, especially since plan fiduciaries are exposed to personal liability.

I've heard some say that you can dislike someone yet still have respect for their knowledge and integrity. Others suggest that you may want to break bread with an individual over lunch but want to avoid having to depend on their judgment about serious matters. I supposed the ideal is to both like and trust someone to be careful about things such as vendor selection, changing an investment line-up, freezing a plan and so on. When the perfect combination of sparkle, professionalism and gray matter is non-existent, what should a fiduciary do?

I haven't seen much on this topic about how to select someone to serve as a fiduciary of a pension fund with respect to their personality and integrity. One public plan trustee asked for my opinion about a committee on which he served. His concern had to do with what he deemed to be anemic attempts on the part of one of his colleagues to gather information about various asset managers and asset classes. His fear was that this person would vote "yea" or "nay" without a proper basis. I told him that his anxiety was far from trivial. Based on my experience, this gentleman was right to be scared. When a fiduciary breach complaint is filed, all past and present members of the investment committee are often cited as defendants. The notion is that the fiduciaries were making important decisions on a collective basis.

In my view, there is room for improvement as to how pension plan fiduciaries are selected, trained, monitored for appropriate performance and terminated, as needed. It wouldn't hurt to assess the friendliness factor of each candidate either. Not that everyone has to bond over Friday night pasta but the investment committee typically works as a team. It is important that the members of said team can have an open and meaningful exchange among one another, debate various topics in depth and decide what makes sense for participants thereafter. Speaking in plain language helps. See "Even Pension Board Members Can't Understand Pension Jargon" by Ari Bloomekatz (Voice of San Diego, September 5, 2014), for an interesting example of questions that fiduciaries are right to ask and the disparate level of investment knowledge reflected on a board.

If you have a good story to tell about investment committee dynamics, email  

Pension Governance Grill Lines

I am back from a health camp vacation in the Southwest and excited to blog anew. Besides walking unexpectedly into the path of a poisonous and large, scaly gila monster one night (a "what do I do now" moment I might add), I had a chance to attend a kitchen demo about how to grill seafood. In waxing poetic about equipment, the chef urged the audience to avoid pans that sit atop the stove and instead go for the real thing. He went on to say that substitutes for an outdoor barbeque were so inferior in his view that one might as well paint marks on the food.

Grins aside, applied to pension governance, truer words may never have been spoken. When I testified before the ERISA Advisory Council about hard to value investing, I described some of the best practices relating to governance, risk management and appraisals. My suggestion to those who took more of a hurried approach was to consider installing a comprehensive framework that would allow for checks and balances, appropriate delegation of duties and independent oversight. As I have said on numerous occasions, if that exists at your organization, take a bow. Communicate what that structure looks like. Interested parties will be glad to know.

The illusions of eating a faux grilled steak could dissipate with the first bite.

Pay to Play and Pension Funds

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

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

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

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

2nd Annual Tri-State Institutional Investors Forum

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


  • Dr. Susan Mangiero, Managing Director, Fiduciary Leadership


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

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

Probing Pension Advisers For Possible Conflicts of Interest


In "New York Is Investigating Advisers to Pension Funds" (New York Times, November 5, 2013), Mary Williams Walsh writes that "state financial regulators have subpoenaed about 20 companies that help New York's pension trustees decide how to invest the billions of dollars under their control to determine whether any outside advice is clouded by undisclosed financial incentives or other conflicts of interest." 

Conflicts of interest are not new nor are they are likely to disappear overnight. In 2010, the U.S. Securities and Exchange Commission ("SEC") adopted measures to discourage bad acts. Three elements were cited in "SEC Adopts New Measures to Curtail Pay to Play Practices by Investment Advisers" (June 30, 2010) to include the following items:

  • Prohibition of "an investment adviser from providing advisory services for compensation — either directly or through a pooled investment vehicle — for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official who is in a position to influence the selection of the adviser";
  • Prohibition of "an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others — a practice referred to as "bundling" — for an elected official who is in a position to influence the selection of the adviser"; and
  • Prohibition of "an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions."

In the case of the New York State Common Retirement Fund, with nearly $161 billion in assets in Q1-2013, the single person trustee and New York State Comptroller, Thomas P. DiNapoli, describes numerous attempts to enhance transparency and avoid conflicts. From the official website, one can download files that include:

  • New York State Common Retirement Fund Placement Agent Disclosure Policies and Procedures of the Office of the State Comptroller," last updated on September 11, 2013;
  • "Transactions Compliance Review: New York Common Retirement Fund," dated February 22, 2010; and
  • An amended list, published on May 6, 2009 and disclosing "placement agents used during the administration of Alan Hevesi. The list was amended June 18, 2009 to reflect new information provided by the State Attorney General’s office."

While the published files are a good start, it would be nice to have even more information, especially with respect to the detailed due diligence process that was or is being employed by various advisers for recommended asset managers. My understanding is that the New York Financial Services Superintendent, Benjamin M. Lawsky, has requested pitch books as well as information about compensation levels, the nature of existing relationships between investment advisers and consultants and asset managers and how performance numbers are to be reported, including a description about the assessment of investments that do not trade in a public market. This makes sense given the growth in allocations to hard-to-value positions.

Letting the sunshine in is a good thing for plan participants and taxpayers alike. It would be hard these days for anyone to legitimately criticize attempts to avoid costly conflicts of interest, especially if misaligned objectives lead to grossly imprudent investment decisions.

In recognition of the importance of good pension governance, the National Association of State Retirement Administrators ("NASRA") adopted a resolution to expressly address ethics and disclosure requirements. Excerpting from Resolution 2011-02, it is stated that "Public fund fiduciaries should carefully review the trust and conflict of interest laws applicable to the system to ensure that the fiduciaries’ relationships with other parties are not incompatible with the duties to the system, and service providers to the system should divulge pertinent business activities, relationships and alliances including, among other things i) all services the firm, its principals, or any affiliates provide that generate revenue, ii) if the firm is owned in whole or in part by other firms or organizations, or if the firm owns other firms or organizations, that sell services to public pension systems, and iii) if the firm, its principals, or any affiliate has any strategic alliances with firms that sell services to public pension systems."

As headlines about underfunding and bankrupt cities continue and fiscal policy becomes even more entwined with the investment activity of $3 trillion in public pension coffers, I predict that state and federal investigations will likely go up in number, magnitude and frequency.

Effective Investment Stewards Should Take a Bow

In case you missed it, check out the quirky indie film "In A World..." If you like movies as I do, you will enjoy this lighthearted comedy about the supposed rough and tumble world of voice-overs. The first few minutes are devoted to the memory of Don Lafontaine, the uber vocal artist of countless trailers and commercials who died at the age of 68 in 2008. The story then proceeds to chronicle the efforts of a character played by actress Lake Bell, Carol Solomon, in competing for gigs in a mostly male-dominated industry. (Kudos to Ms. Bell for writing, directing and producing this cinematic gem as well.) Various sub-plots involve the reinforcement of a shaky marriage, connecting anew with a less than supportive father and getting "used" by a female film executive who sees dollar signs in empowering women at the expense of boosting Carol's ego.

Aside from its entertainment value, the production stayed on my mind, hours after the popcorn was gone. Here is why. In a final scene, Carol decides to help young women with squeaky voices learn how to better present themselves. She asks "Are you ready to be heard?"

Applied to the pension world, the question is apt. In an era of rising enforcement and litigation activity, I have often wondered why more governance-focused plan sponsors are refusing to take a bow. In speaking to several of their representatives, the feedback I received is that visibility can be a two-edged sword. My understanding of what others have said to me is that affirmative "best practice" communications might be viewed as a defensive tactic to hopefully keep participants happy and therefore unlikely to sue. The danger is that those same statements could be seen as raising awareness of issues that will lead to questions and unwelcome attention to topics such as fees, risk management and vendor selection.

The subject of how much information to provide is certainly an important one to address. The president of retirement plan services at Lincoln Financial Group, Chuck Cornelio, writes that "The move away from process-focused messages, such as how to enroll, plan mechanics and investment selection, to conversations around the projected outcomes of a participant's savings behaviors and strategies, including future monthly retirement income, spending power and retirement lifestyle, will not happen overnight." Click to read "5 critical elements of retirement plan communication" (Benefits Pro, November 12, 2012).

A recent court action has shed light on the attorney-client privilege as relates to ERISA plan communications. Interested readers can download the presentation about the fiduciary exception rule by Attorney James P. McElligott (Partner, McGuireWoods) and Attorney Ronald S. Kravitz (Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor). It is entitled "ERISA Counsel's Communications with Plan Fiduciaries and Attorney-Client Privilege" (Strafford Continuing Legal Education, April 3, 2013). Attorney McElligott adds that "Fiduciary communication is a critical area. The process starts with a well-written Summary Plan Description ("SPD") but requires constant thought and vigilance."

In its "Fiduciary Checklist," T. Rowe Price authors provide a long list of items that should be disclosed to participants. It is certainly a good start but I would add numerous sections to that list about the governance of any particular retirement plan.

This topic will receive more attention from this blogger, especially as different countries approach the issue of pension governance as a recognized problem, with some plans badly in need of a solution.

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.

U.S. Infrastructure and Pension Fund Investment

The world is truly getting smaller. A recent Wall Street Journal article describes the continued interest on the part of Japanese pension funds to directly invest in U.S. infrastructure projects such as a Michigan power plant. See "Japan's Pension Fund Association Targets Infrastructure Abroad" by Kosaku Narioka (July 2, 2013). Last year, the Ontario Municipal Employees Retirement System ("OMERS") joined forces with Japan's Pension Fund Association and a group led by Mitsubishi to invest $7.5 billion in roads, airports and other types of infrastructure projects. The goals are to raise $20 billion in total, avoid the expense of using intermediaries and gain exposure to long-term assets that are arguably a natural match to a defined benefit plan's long-term liabilities. See "OMERS, Japanese partners launch infrastructure fund" by Greg Roumeliotis (The Globe and Mail, April 26, 2012).

In their 2011 publication entitled "Pension Funds Investment In Infrastructure: A Survey," authors Raffaele Della Croce, Pierre-Alain Schieb and Barrie Stevens estimate the global infrastructure market at U.S. $50 trillion by 2030. This includes climate control projects. They add that, given the strain on numerous municipal and sovereign budgets and regulations that have impaired some banks' abilities to lend, infrastructure financing must depend on private sector finance.

With these opinions in mind, infrastructure investing by pension funds seems like a good idea. There is both a demand for long-term capital and a supply in the form of interested money in search of returns over time. Like any investment and/or strategy however, one needs to weigh risks against expected returns.

Currency risk and project completion risk are two considerations. Being able to obtain and properly interpret adequate performance reports is another concern. In "Insurers call for more transparent infrastructure investments," contributor Louie Woodall (June 14, 2013) writes that opacity is a roadblock to having insurance company institutional investors allocate more money to this asset class. Regulations cannot be ignored either. Olav Jones, deputy director-general of Insurance Europe is quoted as saying that "...the Solvency II calibration for long-term investments does not account for the actual default of these assets, which is the primary risk insurers have to reserve for when using a buy-to-hold strategy." To the extent that pensions may be asked to comply with Solvency II mandates (or something similar for non-European funds), their trustees will no doubt want to ensure that capital is being pledged on the basis of "true" economic risks they deem to be associated with identifed investments.

Fiduciary liability is another factor that, in my view, is seldom discussed. Specifically, there are situations when a pension fund may feel that political pressure is being brought to bear to have trust money used to support a local project. When I recently spoke about pension governance before an audience that included public fund trustees, several persons complained about the exertion of uncomfortable "influence" to allocate assets in a way that could be said to fuel growth for a particular city or county or state but not necessarily fit with the pension fund's investment strategy. I served on a June 17, 2013 panel entitled "Fiduciary Responsibility for Management & Trustees." It was part of the Tri-State Institutional Investors Forum. The conference was produced by the U.S. Markets Center for Institutional Investor Education.

Published in 2008, interested readers may want to download "Pension Fund Investment in Infrastructure: A Resource Paper" by Larry W. Beeferman, JD. I have had the pleasure of speaking about governance and pension risk management at events put together by Mr. Beeferman, senior executive with the Labor and Worklife Program at Harvard Law School.

Another resource is "Trends in Large Pension Fund Investment in Infrastructure" by Raffaele Della Croce (OECD, November 2012). Based on his survey research of beneficial owners with control of more than $7 trillion of assets, he describes infrastructure investing as "attractive" because it can "assist with liability driven investments and provide duration hedging." Later in the report, he discusses the tradeoff between liquidity of these longer-term commitments with the chance to diversify a pension portfolio.

With planes, boats, trains, cars and fast technology, we can go from Peoria to Paris in hours. It is no surprise then that we see pension giants focused at home and abroad.

Pension Risk Governance Blog Celebrates Seventh Birthday

I am delighted to announce our seventh year as an educational resource for the $30+ trillion global retirement plan industry. With over a million visitors to, I appreciate the ongoing feedback and encouragement from financial and legal readers. This blog began as a labor of love and continues to be personally rewarding as a way to help guide the discussions about pension risk, governance and fiduciary duties.

Here is a link to the March 25, 2013 Business Wire press release about, an educational pension risk governance blog for ERISA, public and non-U.S. pension plan trustees and their advisors.

As always, your input is important. Click to send an email with your comments and suggestions.

Thank you!

Pension De-Risking for Employee Benefit Sponsors: Minimizing Risks and Ensuring ERISA Compliance When Transferring Pension Obligations to Other Parties

Click to register for a January 16, 2013 webinar entitled "Pension De-Risking for Employee Benefit Sponsors: Minimizing Risks and Ensuring ERISA Compliance When Transferring Pension Obligations to Other Parties." Sponsored by Strafford Publications, this Continuing Legal Education ("CLE") webinar will provide benefits counsel with a review of pension de-risking approaches used by companies to reduce some of the risks involved with employee retirement benefits. The panel will offer best practices for leveraging the precautions to prevent ERISA fiduciary law violations when making transfers.


As U.S. pension plans face record deficits, options for transferring some or all of a sponsor's plan risk make sense for many companies. General Motors, NCR and Verizon are a few companies that have chosen de-risking options in 2012.

De-risking transactions take many forms, from transferring company obligations to third parties, to offering payouts to plan participants, to undertaking liability-driven investing and other strategies. Counsel and companies must tread carefully to avoid ERISA-based litigation or enforcement actions.

Prudent de-risking requires thorough financial analysis and clear demonstrations that fiduciary standards under ERISA are met. Counsel should guide companies on how to establish the reasonableness of decisions and prepare to defend against possible court challenges.

Listen as our panel of experienced employee benefit practitioners provides guidance on precautions for companies undertaking transfers of pension plan obligations to third parties or other de-risking options. The panel will outline best practices for assembling a thorough financial review, complying with ERISA requirements, and responding to potential legal challenges from plan participants.


  1. De-risking overview
    1. Current trends
    2. Different approaches
      1. Transfers to third parties
      2. Lump sum payouts for participants
      3. Investment strategies
  2. Procedural prudence
    1. Financials
    2. Government filings and participant notifications
    3. Meeting ERISA fiduciary requirements
      1. Prudence
      2. Care
      3. Loyalty
  3. Potential challenges from plan participants
    1. Grounds for challenges
    2. Likelihood of success


The panel will review these and other key questions:

  • What kind of financial reviews are needed to support a de-risking transaction?
  • How can pension providers demonstrate they have met their ERISA standards of prudence, care and loyalty to plan participants?
  • What steps should be taken in preparation for termination of a pension plan?

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
Fiduciary Leadership, LLC, New York Metropolitan Area

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.

Nancy G. Ross, Partner
McDermott Will & Emery, Chicago

She focuses her practice primarily on the area of employee benefits class action litigation and counseling under ERISA. She has extensive experience in counseling and representing employers, boards of directors, plan fiduciaries, and trustees in matters concerning pension and welfare benefit plans. Her experience includes representation of pension plans, ESOPs, trustees and employers.

Anthony A. Dreyspool, Senior Managing Director
Brock Fiduciary Services, New York

He specializes in the investment of assets of ERISA-covered employee benefit plans and all aspects of ERISA fiduciary law compliance.  He has more than 30 years of experience with respect to ERISA matters and has substantial knowledge in the structuring and formation of private real estate and equity funds for the institutional investment market.

CFO Liability and Pension Plan Governance and Risk Management

On October 16, 2012, thousands of CFOs,Treasurers, Vice Presidents of Finance and other corporate leaders will meet in Miami, Florida for a chance to attend timely and informative sessions as part of this year's annual conference of the Association for Financial Professionals ("AFP"). Dr. Susan Mangiero is proud to have been selected to speak at the Association for Financial Professionals' big event. She will be joined by senior ERISA litigation attorney Howard Shapiro with Proskauer Rose LLP to address the topic of CFO liability and pension plan governance and risk management. Click to access information about the Pension & Benefits educational session track that includes this important session and many others.

According to Dr. Susan Mangiero, a managing director with FTI Consulting's Forensic and Litigation Consulting practice and based in New York, financial professionals, board members and their advisors can learn numerous lessons by examining what went wrong elsewhere and, by extension, what to avoid. Mangiero emphasizes that "Litigation is a reality. Mitigating enforcement, regulatory, litigation and reputation risk is hugely important because of the expensive consequences of inaction. For enlightened companies both large and small, employee benefit plan governance is high on the priority list for officers and directors. When retirement plan problems exist, it could compromise a firm's ability to raise capital, finalize corporate finance transactions and/or add to enterprise value. Most importantly, it could mean that a company is unable to keep its promises to plan participants."

Dr. Mangiero is also the author of "Pension risk, governance and CFO liability" (Journal of Corporate Treasury Management, Henry Stewart Publications, Vol. 4, 4, 2012, pages 311 to 323). Click to read "Pension risk, governance and CFO liability."

Click to read "The Risk Manager" by Elliot A. Fuhr and Christine Wu McDonagh (FTI Journal, April 1, 2012) for a current discussion about the importance of having chief financial officers embrace and support enterprise risk mitigation.

Pension Risk, Governance and CFO Liability

My November 2011 presentation about pension risk, governance and liability to financial executives struck a chord. Part of a Chief Financial Officer ("CFO") conference held at the New York Stock Exchange, attendees alternatively listened with interest while adding their insights from the front lines here and there. It is no wonder.

With ERISA litigation on the rise and 401(k) and defined benefit plan decisions often driving enterprise value in a material way, CFOs and treasurers have accepted the obvious. Corporate governance and pension governance are inextricably linked. Make a bad decision about an employee benefit plan and participants and shareholders alike may suffer. As a result, the CFO is exposed to fiduciary liability, career risk and the economic consequences of an outcome with broad impact.

Rather than rely on luck, there is no better time to apply discipline and rigor to employee benefit plan management for those companies that have not already done so. With trillions of dollars at stake, properly identifying, measuring and mitigating pension risks continues to be a critical element of fiduciary governance.

The complexity and ongoing nature of the risk management process is sometimes overlooked as less important than realizing a particular rate of return. Recent market volatility, large funding deficits and pressures from creditors, shareholders, rating agencies and plan participants make it harder for pension fiduciaries to avoid the adoption of some type of pro-active risk control strategy that effectively integrates asset and liability economics.

In "Pension risk, governance and CFO liability" by Susan Mangiero (Journal of Corporate Treasury Management, Henry Stewart Publications, Vol 4, 4, 2012, pages 311 to 323), the issues relating to a panoply of risks such as actuarial, fiduciary, investment, legal, operational and valuation uncertainties are discussed within a corporate treasury framework. Article sections include:

  • Enterprise risk management, employee benefit plans and the role of the CFO;
  • Conflicts of interest and pension plan management;
  • Risk management principles and 401(k) plans;
  • Pension liability and mergers, acquisitions and spinoffs;
  • Prudent process;
  • Pension risks; and
  • Benchmarking success.

Click to download "Pension risk, governance and CFO liability" by Dr. Susan Mangiero, CFA, FRM.

ERISA and Securities Litigation Snapshot -- Things You Can Do Now to Minimize CFO and Board Liability

In the last few years, pension funding levels and 401(k) account balances have fallen dramatically. New disclosure rules, volatile market conditions, investment complexity and mandatory cash contributions are only a few of the many challenges that are unlikely to go away. Not surprisingly, ERISA litigation continues to grow, along with lawsuits related to employee benefit plan governance. Personal liability claims against C-level executives and board members have become the normal.

Join FTI Consulting and the Securities Docket for a timely and informative webinar about the link between employee benefit plan management and shareholder value.

During this 60 minute live event, attendees will learn:

  • Why ERISA litigation claims against top executives and board members continue to grow
  • How securities litigation and ERISA filings are related and what it means for corporate directors and officers
  • What ERISA liability insurance underwriters want clients to demonstrate in terms of best practices
  • What steps the Board and top executives can take to minimize their liability
  • What investment fiduciary bad practices to avoid
  • When to get the CFO and board members involved

The distinguished panel includes (a) Attorney Jim Baker, ERISA litigator of the year for 2012 and a partner with Baker & McKenzie (b) Ms. Rhonda Prussack, EVP and Fiduciary Liability Product Manager for Chartis (c) Mr. Gerry Czarnecki, governance guru and State Farm Insurance board member and (d) Dr. Susan Mangiero, Managing Director with FTI Consulting’s Forensic and Litigation Consulting Practice in New York.

To register for this March 7, 2012 webcast, click here.


Pension Risk Management and Governance: Challenges and Opportunities in a New Era


Please join me and fellow panelists on January 24, 2012 fro. 4 to 6 pm for a topical discussion about pension risk management and governance. Given that the last few years have posed unprecedented challenges for plan sponsors, both corporate and public, as well as their asset managers and consultants, life in employee benefit land will never be the same again. Market volatility, low interest rates, increased scrutiny about carrying out fiduciary duties, calls for better disclosure and greater complexity keep pension decision-makers busy.

Hear what legal and financial professionals have to say about what keeps plan sponsors and their advisors and asset managers up at night and how they can implement best practices for pension risk management within a fiduciary framework.

The roster of speakers who will address both defined benefit and defined contribution plan best practices and concerns include:

  • Mr. William Carey, President, F-Squared Retirement Solutions
  • Attorney Gordon Eng, General Counsel and Chief Compliance Officer, SKY Harbor Capital Management, LLC
  • Dr. Susan Mangiero, CFA, FRM, Risk and Valuation Consultant and Expert Witness
  • Attorney Martin J. Rosenburgh, CFA
Continue Reading...

Pension Governance Ranks High As a Priority

As this blogger, Dr. Susan Mangiero, has pointed out repeatedly since the March 2006 inception of, pension governance counts.

There are numerous ways to quantify the positive impact of governance done well. By extension, the costs of poor pension governance can throw cold water on growth in corprorate earnings and free cash flow. As a result, not only can plan participants suffer but so too can shareholders and creditors should bad employee benefit plan decision-making depress the value of company issued securities.

In a recently issued survey, Towers Watson finds that four out of ten employers "expect to devote more time addressing retirement plan governance issues over the next two years." Reasons cited include the expense of providing benefits, along with more regulatory complexity. Investment volatility was another identified catalyst.

While the in-depth study is not yet published by its sponsor, Towers Watson, it will be interesting to explore later on why more than half of respondents acknowledge the importance of compliance but "only one in four (26%) schedule regular compliance reviews."

Visit for more information.

Susan Mangiero Authors Pension Risk Blog For Fifth Year

Five years ago, valuation and risk management professional Dr. Susan Mangiero launched the first blog devoted exclusively to the topic of retirement plan governance and investment best practices. This unique blog,, continues to serve as a resource for ERISA and public plan trustees, board members, actuaries, advisers, attorneys, auditors, consultants, money managers and regulators who want to explore important ideas about pension risk issues within a fiduciary framework.

Since the inception of, the challenges that confront retirement plan decision-makers continue to mount. The U.S. Department of Labor (“DOL”) and U.S. Securities and Exchange Commission (“SEC”) each seek to expand the definition and scope of investment fiduciary duties. Pension litigation is on the rise with some lawsuits being certified as class actions and resulting in multi-million dollar settlements. Liability insurance underwriters and federal, state and international regulators are asking tough questions about risk-taking and due diligence. Lawmakers actively examine issues relating to 401(k) fees. Taxpayers worry that more than $3 trillion of unfunded IOUs will strain local budgets. Pay-to-play and other types of conflict of interest investigations grab headlines. Investors worry that bad employee benefit plan economics could roil share prices or thwart corporate mergers.

Click here to read the rest of the March 23, 2011 press release about

Pensions and Politics

As Americans head for the polls today, pension reform is front and center for more than a few politicians in waiting. Unfortunately, the situation is far from trivial and transcends global borders. A trip around the world illustrates the potential perils:

I foresaw the tempest several years ago when I then described the inevitable "politicization" of employee benefit plan issues. On July 27, 2006, I wrote of a "tea party redux" with numerous state pensions in serious turmoil and the ill-effect on taxpayers who vote.

Alas, the problem has become much worse since then. According to "Pension Politics" by Girard Miller (Governing, July 22, 2010), the "blowout has not been capped." Material accounting changes are on their way, alongside significant economic devastation for states, cities and counties alike.

In the words of the former U.S. Speaker of the House, Tip O'Neill, "all politics is local." The problem is that our flat earth economy makes retirement plan reform a mandate for everyone, regardless of where you live. The longer the politicians wait to tackle the obvious need for change, the more acute the pain for us all.

Do Institutional Investors Have More Clout Now?


This week has been an eye opener in terms of customer service. As I've been signing off on more than a few big purchases related to the opening of a new office, I've noticed that some companies are definitely better than others when it comes to the care and feeding of those who fund their paycheck.

Take Company A for example. Since certain of their models are forced into obsolescence by top management (though still functional), they no longer sell spare parts so one has no choice but to toss otherwise viable products in the trashbin. It seems wasteful to this budget-focused gal but the vendor leaves me little room to maneuver. 

Then there is Company B. A purveyor of premium communication accessories, their service representative took down copious details about shipping location and what products we wanted to order. However, to pay for the merchandise, we were directed to a separate billing clerk who had us repeat all the gory details because the two departments had systems that did not talk to one another.

Company C has limited customer service hours and no "Contact Us" email address posted on their website. Hence, we were forced to take precious time during the next work day to call the vendor after we missed reaching them during a limited client care window. It would have been so much nicer to be able to call during extended hours or send a quick email.

The list goes on. I'm sure readers have their own tales to tell.

Anyhow, this repeated angst got me to thinking about client service in buyside land, fiduciary asymmetries and balance of power when it comes to large-scale purchasing. We've conducted enough market research studies to know that things are definitely changing in favor of institutional investors for a bunch of reasons.

Yet, and somewhat puzzling to some (though not to us), there still seems to be a disconnect between how certain products and services are sold to buy side executives. Some transactions that should make immediate sense are not necessarily causing the cash register to kaching for vendors.

Take risk management information technology or due diligence audits for example. Arguably a no-brainer to buy a product or service that helps one better identify, measure and manage risk, whether monies are being managed internally or not, some areas of IT and consulting spending have dipped according to recently published industry reports. While this may change (risk control is the new cool and budgets are being relaxed a bit), a reasonable person logically asks about barriers that currently inhibit sales. VERY importantly, part of the conundrum is the proper identification as to who makes for a logical buyer - Asset Manager? Consultant? Institutional Investor? All of the Above? None of the Above? Other?

When we've dug deep with organizations on both sides of the fence, we've heard variations of the following (with a gigantic caveat that there are some terrific companies in the vanguard when it comes to infrastructure that explicitly embraces their sensitivity to the fiduciary duties for which their institutional investor clients are responsible to discharge):

  • From a hypothetical service provider - "We aren't going to implement best practices X, Y and Z until the institutional investor requires us to do so. Otherwise, we're spending money we don't have to spend." 
  • From a hypothetical consulting firm - "We couldn't possibly engage in all of the best practices you recommend because of the costs to implement. We can't charge our clients enough to recoup our outlays."
  • From a hypothetical institutional investment executive - "We just assumed that our vendors are doing what they need to do in order to vet qualitative and quantitative risks appropriately.

No doubt lasting changes are underway with respect to industry participants, pricing structure and investment governance policies and procedures. With turmoil, there is tremendous opportunity to do well by doing good. We are excited about what the future holds in terms of investment best practices.

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.


New Study Addresses Pension Risk Management Gaps

 At a time of great market turmoil, plan participants, shareholders and taxpayers want to know whether their retirement plans are in good hands. Risk is truly a four-letter word unless plan sponsors can demonstrate that a comprehensive pension risk management program is in place. Unfortunately, there is little information that details if, and to what extent, plan sponsors are doing a credible and pro-active job of identifying, measuring and mitigating a variety of risks. The risk alphabet includes, but is not limited to, asset, operational, fiduciary, legal, accounting, longevity and service provider uncertainties.

While no one could have predicted the extreme volatility that characterizes the current state of global capital markets, it has always been known that poor risk management can make the difference between economic survival and failure. Applied to pension schemes, ineffective risk management could prevent individuals from retiring at a certain age and/or leaving the work force with much less than anticipated. Others pay the price too. Taxpayers worry about rate hikes that may be inevitable for grossly underfunded public plans. Shareholders could find themselves on the hook for corporate promises or experience depressed stock prices due to post-employment benefit obligations.

In an attempt to shed some light on this critical topic area, Pension Governance, LLC is pleased to make available a new research report that explores current pension risk management practices. In what is believed to be a unique large-scale assessment of pension risk practices since the publication of a 1998 study by Levich et al, this survey of 162 U.S. and Canadian plan sponsors seeks to: (1) understand why and how pension plans employ derivative instruments, if they are used at all (2) identify what plan sponsors are doing to address investment risk in the context of fiduciary responsibilities and (3) assess if and how plan sponsors vet the way in which their external money managers handle investment risk, including the valuation of instruments which do not trade in a ready market. The report was written by Dr. Susan Mangiero, AIFA, AVA, CFA, FRM, with funding from the Society of Actuaries.

Each survey-taker was asked to self-identify as a USER if he/she works for a plan that trades derivatives in its own name. A NON-USER works for a plan that does not trade derivatives directly but may nevertheless be exposed indirectly if any of the plan's asset managers trade derivatives.

In answering broad questions, a large number of surveyed plan sponsors describe themselves as doing all the right things to manage investment, fiduciary and liability risks. However, answers to subsequent questions - those that query further about risk procedures and policies at a detailed level - do not support the notion that pension risk management is being addressed on a comprehensive basis by all plans represented in the survey sample.

Key findings include the following points:

  • Plan size seems to be one factor that distinguishes USERS from NON-USERS, with 39% of USERS managing plans in excess of $5 billion versus 14% of NON-USERS associated with plans larger than $5 billion.
  • Pension decision-making appears to vary considerably by job function, with 48% (37%) of USERS (NON-USERS) choosing "Other" rather than selecting from given titles such as Actuary, Benefits Committee Member, CFO or Human Resources Officer.
  • Time allocation varies considerably with 64% (40%) of USERS (NON-USERS) saying they devote 75 to 100 percent of their work week on pension issues. In contrast, 37% of NON-USERS say they spend 0 to 24% of their work week on pension issues.
  • A majority of USERS (64%) and NON-USERS (48%) have had discussions about the concept of a fiduciary duty to hedge asset-related risks. A smaller number say they have discussed the concept of a fiduciary duty to hedge liability-related risks.
  • Few plans currently embrace an enterprise risk management approach with 59% (57%) of USERS (NON-USERS) responding that their organization does not use a risk budget. When asked if their organization has or is planning to hire a Chief Risk Officer, 57% (64%) of USERS (NON-USERS) answered "No."
  • NON-USERS cite numerous reasons for not using derivatives directly, including, but not limited to, "Lack of Fiduciary Understanding" (25%), "Perception of Excess Risk" (31%), "Considered Too Complex" (23%), "Prohibition Against Possible Leverage" (19%) and/or "Defined Benefit Plan Risk Not Considered Significant" (28%).
  • A query about whether survey-takers review external money managers' risk management policies results in 70% (58%) of USERS (NON-USERS) responding "Yes." Fifty-two percent (57%) of USERS (NON-USERS) say they review external money managers' valuation policies. This survey did not drill down with respect to the rigor of questions being asked.
  • Survey respondents seem to rely mainly on elementary tools to measure risk. Eighty-three percent (64%) of USERS (NON-USERS) rank Standard Deviation first in importance. Seventy-nine percent (63%) of USERS (NON-USERS) rank Correlation second. Only one-third (38%) of NON-USERS cite Stress Testing (Simulation). Four out of 10 USERS cite Value at Risk in contrast to 23% of NON-USERS who do the same.
  • Survey respondents worry about the future with 58% (60%) of USERS (NON-USERS) ranking "Accounting Impact" as a concern. Other concerns were also noted to include "Regulation," "Longevity of Plan Participants" and "Fiduciary Pressure."

Click to download the 69-page study, entitled "Pension Risk Management: Derivatives, Fiduciary Duty and Process" by Susan Mangiero. Given the large file size, readers are encouraged to (a) first save the file (right mouse click) and then (b) open the file from wherever you have saved the file. Otherwise, you may receive an error message, depending on your computer configuration. 

The study is also available by visiting Send an email to if you experience any difficulty in downloading the pdf file and/or want to comment about the study.

Retirement Fallout - Breaking the Bank, Piggybank That Is

According to financial reporter Jennifer Levitz, a dismal trifecta accounts for recent retirement withdrawals. Rising unemployment, stricter credit conditions and a sagging equity market make defined contribution piggybanks a tempting target. Despite a 10 percent penalty for early withdrawals, participants are tapping into their post-employment savings to make ends meet. In addition, and not surprisingly, some employees are reallocating away from equities into money market funds.

Overall, "Investors Pull Money Out of Their 401(k)s" (Wall Street Journal, September 23, 2008) paints a gloomy picture of the retirement landscape. Keep in mind that traditional defined benefit plans are no longer a reality for countless individuals. A dwindling 401(k) plan balance spells real hardship since many participants will be unable to "make up" any monies taken out before they exit the workforce.

On the topic of 401(k) plans, ERISA attorney Stephen Rosenberg vents about poor plan governance as described in Fixing thte 401(k) by Joshua Itzoe (earlier reviewed by this blogger). Alleged excessive fees, poor investment choice selection and not controlling plan costs are a few of the ills he deems important yet beyond the reach of plan participants who "have neither the power, responsibility nor authority" to address fiduciary problems by themselves. Click to read the Boston ERISA & Insurance Litigation Blog.

Pension Fund Governance in the Lonestar State

Hat tip to Robert Elder, journalist for American Statesman, who writes that a prominent Dallas financier has been jettisoned as chairman of the Texas Pension Review Board, "which oversees nearly 400 public pension systems that hold $200 billion in assets." In "Perry ousts head of pension board" (American Statesman, June 24, 2008), Elder describes Frederick Rowe as a vocal critic of alternative investment commitments by retirement plans that do not always fully consider risks.

According to its website, the Texas Pension Review Board has a variety of duties, including the oversight of "the actuarial analysis process" and making recommendations of "policies, practices, and legislation to public retirement systems and their sponsoring governments." If one clicks on "Tools," you can download the audio files of board meetings. The most recent one (dated April 10, 2008) is worth a listen as it centers on asset allocation and risk assessment with then Board Chairman Rowe criticizing a "backward-looking" approach to assessing investment performance and a reliance on investment consultants who advocate alternatives and "reduce what they call risk in patching together this crazy quilt of uncorrelated assets." (It's a large file and may take a few minutes to download.) 

In its "Written Investment Policies for Public Pension Systems," the section on risk is brief and focuses on the erosive impact of inflation and the possible gap between actuarial interest assumptions and realized performance. The statement that "to increase one's understanding, one can also look at the actual rates of return and volatility for the past 25 years" caught my eye. As most financial experts know, the risk-return tradeoff, along with correlation patterns (and much more), can change dramatically over time. To rely only on historical numbers without conducting a "what if" analysis (which may be a regular activity by various Texas plans) is ill-advised. Additionally, a decomposition of a period as long as 25 years into economic "regimes" goes a long way to avoid the artificial smoothing of risk measurements. Decisions based on metrics that lower risk may not always be the best ones, putting it mildly. However, to be fair, readers are urged to describe investment objectives in terms of return (absolute and relative) as well as the risk-adjusted rate of return. It would be nice to see this document beefed up to include extensive guidance on how various risks (economic, operational, default, etc) will be measured, monitored and managed.

In a separate article ("TRS switches key outside law firm," American Statesman, July 24, 2008), Elder writes about a recent change of fiduciary counsel that has apparently upset some trustees of the Teacher Retirement System of Texas. Elder describes the decision as "unusual" because of a close split vote and imminent plans to discuss "governance policies and ethics rules in September" (suggesting that some trustees favor continuity). One pension attorney with whom I recently spoke offers that a change of fiduciary counsel is not in and of itself a red flag.

In a lengthy comment, posted to Elder's blog, Public Capital, Mr. Jim Lee, Board Chairman of TRS writes that "8 trustees voted for or expressed support" for the hiring of a new outside legal expert and that trustees unanimously voted in favor of "diversification changes in April 2007." He adds that a variety of alternative investments "will make up potentially another 30 percent of the portfolio, up from approximately 4.5 percent" as part of a "very deliberate progression." Printed page 68 of the Comprehensive Annual Financial Report (for fiscal year ending on August 31, 2007) shows a private equity target allocation of 10% with a minimum range of 5% and a maximum range of 15%. The given target for hedge funds is 4% with a minimum range of 0% and a maximum range of 5%. The target for real estate is 10% with a minimum range of 5% and a maximum range of 15%.

As stated many times herein, alternative investments are not inherently "good" or "bad." However, as more U.S. and non-U.S. plans (public and corporate) invest in alternatives, it is extremely important to understand how decisions are made with respect to risk assessment, including valuation of "hard to value" assets. In the case of TRS, with a total fund value as of August 31, 2007 of $111.1 billion, the aforementioned annual filing cites the creation of a risk committee of the board to oversee "the overall risk of the portfolio" and establish "policies and practices to measure, manage and mitigate" exposures. A second initiative is the determination of "key risk parameters", derivative instrument limits and related counterparty credit ceilings, along with addressing liquidity, operational, settlement and legal uncertainties.

Editor's Note: The Teacher Retirement System of Texas was cited as "Public Pension Fund Investor of the Year" by Alternative Investment News, an Institutional Investor publication. Click to read the June 26, 2008 press release.

Pensions Lose Key Players

According to "Public funds taking long view" by Raquel Pichardo (Pensions & Investments, July 23, 2008), pension decision-makers are retiring in droves. At a time of great uncertainty and a fast-changing operating environment (new accounting rules, market volatility and increased transaction complexity) it may not be easy to quickly replace experienced professionals. Add the fact that public plans are not always in a position to match industry wages and real concerns emerge.

Succession planning is likewise important when it comes to vetting the riskiness of external money managers. When pensions allocate monies to various hedge fund and/or private equity partnerships, they are essentially making a bet on whether existing management can turn in a "good" risk-adjusted performance on a regular basis.

  • What happens if any or all of the key persons leave for greener pastures as superstar traders are wont to do?
  • What happens if a general partner gets divorced and, absent a plan to protect partnership assets, the spouse becomes the new owner? What happens if that spouse knows little about running a financial partnership)?
  • What happens if a senior partner or managing member (in the case of a Limited Liability Company) is in an accident and rendered unable to make important decisions about strategy?

If not already part of the RFP and/or periodic reviews of external money managers, pension fiduciaries should add questions about key persons, key person insurance and whether a succession plan exists. Ex-ante investigations can potentially save plan sponsors a lot of grief later on.

Doris Day, Scarlett O'Hara and Financial Market Tumult

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 Editor's Notes:

Pension Fantasy Football - Any Takers?

I consider myself a relatively smart person, certainly (hopefully) smart enough to know when I don't know something. What falls in the category of "don't count on me?" Well, besides the fact that my husband begs me NOT to cook EVER again (my efforts being relatively inedible that is), I know very little about sports. Indeed, if ever asked to appear on Jeopardy, "sports" would be my Achilles' Heel. This doesn't mean that I disdain sports. To the contrary, I am learning to play golf, I take yoga classes (not quite a "sport") and I love to exercise. I hope to take up tennis when I have more free time.

That said, what does remain a complete mystery to me is the fascination with fantasy football (and equivalents for other sports). I know it's a popular pastime. My nephews and more than a few colleagues (mostly male) play for hours. WikiAnswersTM puts the number of worldwide players at 30 million. According to Fox Sports, "While only a select few extremely wealthy individuals have the privilege of owning a real NFL team, anyone can enjoy the thrill of owning a team of NFL players by playing fantasy football." Still, one wonders. Why not just watch football on television or in person or go out and play a game with friends? Doesn't the "real thing" offer a superior experience?

As I ruminated on the mysteries of fantasy football the other day (after the topic arose in conversation), it struck me that pension fiduciaries might learn a thing or two by simulating a "dream team" and watching their progress in moving the "ball" (effective pension governance) down the field. From his comments in "Pension funds get code of conduct from money manager group," it sounds like pension scholar Keith Ambachtsheer agrees that structural changes must be made to ensure proper pension governance. Pensions & Investments reporter Jennifer Byrd quotes this author of Pension Revolution: A Solution to the Pensions Crisis as saying "The truly best practice, and what pension funds need, is a corporate structure" that relies on knowledgeable professionals to run the plan with oversight from the board. This contrasts with "the current system of lay individuals being named trustees and then looking to outside experts for assistance."

(This blog will talk about the final Code of Conduct in a subsequent post.  For now, readers can download the document from the CFA Institute website.)

Fiduciary dysfunction is not a new topic but is nevertheless extremely important. Two years ago, pension professional Wayne Miller and Dr. Susan Mangiero wrote "Do Fiduciaries Need Better Incentives to Make the Retirement System Work?" (Executive Decision, January-February 2006). Here is an excerpt.

<< Imagine a time in the not too distant future. Retirement systems everywhere are in disarray. An outside specialist is asked to diagnose the problem and suggest a cure. A capitalist at heart, solutions-oriented and cognizant of a fiduciary imperative, she identifies the usual suspects—complex regulations, compelling demographics and overly optimistic economic assumptions.

Then, defying conventional wisdom, she asks the unthinkable. Has anyone looked at the role of fiduciary incentives? Do those in charge get rewarded for what they do well or penalized for what they fail to do? Who, if anyone, claims ownership of the retirement issue? Are these individuals empowered to effect meaningful change? How do we measure accountability for achieving plan goals? What alarm bells will ring in time to permit corrective action?

The room is quiet. No one knows what to say. The silence is deafening.

Sadly, current attempts at pension reform are likely to fail because they do not effectively address human behavior. People are motivated by rational self-interest and the promise of recompense for a job well done. This is not a bad thing. To the contrary, it is a cornerstone of a well-functioning market economy. Make it worthwhile and some clever person will figure out how to deliver a better mousetrap at a lower cost with the end result that we all benefit. >>

Click to read the full text of "Do Fiduciaries Need Better Incentives to Make the Retirement System Work?"

What do you think? Do we need a pension version of fantasy football or should organizations hunker down and create the real thing? I vote for the latter! (If your organization already has a pension dream team "for real," take a bow - and tell us more by email.)

Hedge Fund Investing: Change is Good, You Go First

Thanks to Scott Adams and his popular Dilbert for continued wisdom in the work place.  I own a few Dilbert tee shirts, including one that says it all - "Change is Good, You Go First." It's rather apt when you consider the flurry of news about hedge fund investing by pension funds. As we reported on February 29, the U.S. GAO study takes a serious look at billions of dollars flowing into hedge fund coffers. (See "Hedge Funds: Regulators and Market Participants Are Taking Steps to Strengthen Market Discipline, but Continued Attention Is Needed.)" In the UK, the Hedge Fund Working Group published "Hedge Fund Standards: Final Report" in January 2008. With over 130 pages of suggested guidelines about risk management, valuation and investment policy, it reminds institutions, consultants and managers that due diligence is a weighty endeavor.

A read of these and other attempts to shed light on the growing hedge fund industry begs several central questions, ones that arose many times during the February 28 master class I led on hedge fund risk management and valuation.

  • Who is responsible for writing the checks to hire an independent third party who can review valuation policies and procedures - the investor or the fund manager or both?
  • Should a pension/endowment/foundation hire a consultant or fund of funds manager or both?
  • What if neither the consultant or fund of funds manager is willing to vet mark to model numbers for complex securities? (As we've discussed before, more than a few organizations are declining to review valuation numbers and instead accepting marks from traders who are seldom impartial since their compensation is tied to reported performance.)
  • Who properly bears the liability of poor decision-making with respect to hedge fund risk management and valuation? In "Illiquid Assets Expose Fund Directors to Legal Risk," Hedgeworld reporter Bill McIntosh cites Baronsmead Insurance Brokers as saying that fund directors "may be taking on personal liability for the fair valuation of highly illiquid assets." What about pension fiduciaries who delegate oversight? What is the extent to which they are liable?

If Dilbert is correct, change is impossible unless someone makes the first move. With respect to hedge fund investing, identifying who pays for what and when is a big deal.

Pension World is Flat

Despite colorful tales of medieval historians disputing its shape, most people then and now realize that the earth is not flat. We won't get to the end and fall off. Indeed, we're arguably more interconnected than ever before. So it's not surprising that a galaxy of international speakers convened in Sydney with many of the same problems, challenges and concerns as US peers. A recurring theme emerged for everyone in attendance at the Asset Allocation Summit 2008 - Investment management is all about risk. Identification, measurement and control are important,. regardless of plan design and country of origin. In fact, the similarities as to what keeps folks up at night are eerily striking, whether voiced by a plan sponsor from Europe, Asia, Australia or North America. Here are a few concerns that resonated with all in attendance.

1. How can investment fiduciaries minimize their liability exposure, especially when investment strategies are becoming more complex and diverse?

2. What is the responsibility to defined contribution plan participants, knowing that many will retire without ample means to maintain a particular lifestyle?

3. How can one avoid paying "excess fees" to managers?

4. What is the proper way to separate beta from alpha?

5. What is the role of infrastructure investing?

6. Should allocations to 130/30 strategies (and equivalents) come from equity or alternatives?

7. Will a recession be global in nature?

8. How much oversight is required by internal fiduciaries who delegate manager selection to consultants?

9. Is ESG (Environmental, Social, Corporate Governance) investing a plus or minus in terms of fiduciary duties?

10. How should derivatives be properly used and by whom (the plan, the money manager or both)?

Sound familiar? If so, perhaps we should be thinking about how to operate within a flat pension world. Credit Thomas Friedman for pointing out the oneness that pervades global thinking. In his best-selling "The World is Flat," he emphasizes the connections among seemingly disparate markets. Should we care about the governance of pension funds outside our borders? In a word, "yes." What is done elsewhere impacts an increasingly "flat" network of capital which in turn influences the investment opportunity set within our borders..

Isolationism is over for most everyone. What about you?

Move Over Madonna - Pension Tension Blues Video Debuts

A few months ago, Pension Governance, LLC introduced PENSION TENSION BLUES in MP3 file form. We now present our 5-minute musical commentary, written for fiduciaries and beneficiaries, as a video for your viewing pleasure. We hope PENSION TENSION BLUES will make you laugh and cry at the same time. (Email us if you want a medium or high resolution version of this video.) You can also watch the video directly on

Inspired by those who bring attention to serious issues through humor, Dr. Susan M. Mangiero (President and founder of Pension Governance, LLC) and Mr. Steven Zelin (The Singing CPA) have co-created a (hopefully) memorable ballad about the state of affairs in retirement benefits land. Pension Governance, LLC is committed to helping fiduciaries do a better job of identifying, measuring and managing financial risk. We hope the song is a friendly reminder of the hard work ahead. The decision to use satire is in no way meant to impugn the countless fiduciaries already on the right track. We simply want to draw attention to areas of growing concern to employees, retirees, shareholders and taxpayers alike.

To those in the vanguard of pension governance, bravo! Email your success stories and we will gladly publish them.

If you want to sing along, here are the lyrics.

Words by Susan M. Mangiero and Steven Zelin
Music by Steven Zelin
Copyright 2007 Pension Governance, LLC and Steven Zelin.
All rights reserved.
71 bpm

I work for a corporation. I’ve been there 30 years
But my pension plan went bankrupt;
It has left me in tears
They’re telling me now I gotta work till I’m 432
I got the pension tension bliss suspension nobody ever mentioned blues

I signed that stupid paper 100 years ago
It said if I worked forever, they’d give me lots of dough
I wish I knew what happed; I can’t find many clues
I got the pension tension bliss suspension nobody ever mentioned blues

I thought the plan was looked at by a bunch of CPAs
Thought they said it all looked just fine, then gave their Okay’s
But I guess something was happening outside their view, now
I got the pension tension bliss suspension nobody ever mentioned blues

They invested in some hedge funds and paid up lots of fees
They gambled all my money, with no guarantees, now
I’ve got nothin’ for tomorrow and you know I’m gonna sue
I got the pension tension bliss suspension nobody ever mentioned blues

Guess I should have realized my account was discretionary
Now all I got is these papers. What’s a fiduciary?

I’m putting all my stuff on e-bay, I gotta raise some cash
My piggy bank is empty, my portfolio has crashed
I read that Social Security has gone down the tubes
I got the pension tension bliss suspension nobody ever mentioned blues
I got the pension tension blues
I got the pension tension blues

Subprime Crisis and Pension Governance

In "Investing in Good Governance: Subprime-Related Losses Stir Up the Conversation," reporter Rachel McMurdie addresses the growing number of lawsuits in pensionland, along with an urgent focus to identify improvements that can and should be made. Interviewing this blog's author and fellow blogger, attorney Stephen Rosenberg, McMurdie describes recent attempts to codify pension governance standards. One initiative, the Clapman Report, is something I analyzed at length when it was published in the summer of 2007.

Click to read the full text of "Investing in Good Governance" (The Institutional Real Estate Letter, January 2008). Click for our take on the Clapman Report

LaRue, Corporate Governance and the Next Pension Enron

In response to my query about Justice Roberts and his comment about a plan's SPD, ERISA attorney Stephen Rosenberg wrote "Susan Mangiero was taken by the discussion in the oral argument of what powers may or may not have been identified in the summary plan description appended to LaRue’s complaint. I took this discussion by the Justices to be part of an inquiry into what are the constraining parameters of a claim such as the one brought by LaRue." Go to Boston ERISA & Insurance Litigation Blog for additional discussion.

The Wall Street Journal's Law Blog had an interesting post on LaRue. (I included the link a few days ago and am including it here again.) Several folks commented in response, including this blog's author. See below for my response (with a bit of editing).

<< I concur with the Nov. 27 post by the ERISA Consultant. Pension governance is serious business for millions of individuals who are impacted by the decisions made by plan fiduciaries. Hopefully, the LaRue case (regardless of outcome) will prompt a vigorous debate about fiduciary issues - who has responsibilities for what tasks and how retirees are impacted if breach occurs. Shareholders should be paying attention to LaRue as well. Poor governance of retirement plans can have a material adverse impact on earnings. >>

As I have said many times and will no doubt say many more times, pension governance (broadly defined as best practices, applied to all retirement plan types) is an integral part of corporate governance. While this message is gaining currency, most experts in the fiduciary space assert that there is vast room for improvement. If you agree (and not everyone does), a critical question comes to mind.

What will it take for pension governance to be viewed as equally important as mainstream corporate governance issues such as (a) proxy voting (b) executive compensation (c) financial statement certification (d) internal controls and (e) agency conflicts between managers and shareholders?

Negative headlines about Enron and other troubled companies forced shareholders and lawmakers to pay attention. Do we need a pension meltdown a la Enron to force change in the retirement industry?

We would love to get your feedback on what you think will force pension governance to quickly climb the "high priority" list for organizations not already concentrating on such. Click here to drop us a line.


Pension Fund Governance - Campaign Against Corruption


According to "Clean Up" (Global Proxy Watch, November 2, 2007), the California State Teachers' Retirement System ("CalSTRS")  has approved new rules that seek to prevent the practice of "pay to play." Set to become effective as of November 28, 2007, California Code of Regulation, Title 5, Division 3, Chapter 1, Article 14 prohibits campaign contributions to board members in excess of $5,000 per year from any firm providing investment services. CalSTRS self-identifies as the "first public pension fund in California to pursue ethics reform of this scope."

Editor Stephen Davis writes that the focus on pension fund governance continues unabated in the UK, US and elsewhere. We appreciate the nod to our efforts at Pension Governance, LLC.

Davis concludes with a quote by former U.S. SEC chief Arthur Levitt who, in a recent speech, emphasizes the need for improvement. Referring to pension fund governance as a "ticking time bomb," he urges trustee literacy as one of several solutions. See "Ex-Chief of S.E.C. Says Pension Funds in Danger" by Mary Williams Walsh, New York Times, October 31,2007.

Dr. Susan M. Mangiero to Lead Valuation Masterclass

Pension Governance, LLC is proud to be a media sponsor of the Asset Allocation Summit Australia 2008. This blog's author is personally delighted to lead the master class about valuation. Entitled "Global best practices in hedge fund valuation and risk management ," the class will examine topics such as biggest risks for hedge funds in valuation, what makes for an effective valuation process and difficulties in valuing private equity holdings and complex derivatives.

Click here for more details.

See you "down under."

ERISA Litigation Calculus

Attorney Stephen Rosenberg, creator of the Boston ERISA & Insurance Litigation Blog, provides some interesting thoughts about legal trends. Citing yours truly about the surge in pension lawsuits, Rosenberg offers that courts will struggle with "new issues, or old issues under new fact patterns" with sheer numbers urging the judiciary to clarify. He adds that a pronounced switch from defined benefit plans to 401(k) offerings is likely to drive complaints, with plan participants demanding to know more about those individuals in charge of design and investment selection. Click here to read  "ERISA Number of Suits + Questionable Practices = X" (posted on October 10, 2007) and other analyses by this prolific writer.


Pension Governance Woes in Public Sector

Talk around the pension water cooler often turns to questions about which system will implode first. In a newly published article about pension governance, Governing correspondents, Katherine Barrett and Richard Greene, suggest that some public plans may soon make the "most wanted" list. Citing LongHorn state blues, Texas Attorney General Greg Abbott is quoted as saying that ”Inadequate governance will cause a pension fund to nose-dive and crash.” Other states are feeling the heat too, especially now that accounting rules have forced additional disclosures of post-employment health care benefit costs.

Conflicts of interest, fraud in some cases, political cronyism and little, if any, board training for persons making multi-million dollar decisions are some of the reasons to think the glass is half-empty.  Uncertainty for retirees is bad enough but don't forget that taxpayers are ultimately on the hook for funding these benefits. (Click here to read our 2006 post entitled "Tea Party Redux: State Pensions in Turmoil.")

This blog's author is quoted in an accompanying featured Q&A. Offering suggestions to improve board performance, I likewise provided thoughts about the rise in pension fiduciary breach litigation and described a few of the many risk management standards for prudent investing.

Click here to read the Q&A interview and here to read the full text article entitled "The $3 Trillion Challenge" (Governing, October 2007 cover story).

Valuation Problems Are Going To Cost Plan Sponsors Big Time

This blog's author recently had the pleasure of addressing an audience of hedge fund compliance officers and auditors about valuation issues - a topic near and dear to my heart. As an accredited appraiser, a certified financial risk manager and someone who has worked with models and trades, I am fully aware (and in fact often tout) the inextricable relationship between risk analysis and valuation. Simply put, effective financial risk management does not occur in a vacuum but rather depends on reliable valuation numbers. GIGO (Garbage In, Garbage Out). If a fund manager relies on faulty information, the inevitable result is flawed process, including (but not limited to) inaccurate hedge size (if hedging occurs), imprecise performance reports, possible asset allocation or portfolio re-balancing mistakes, trading limit utilization problems and so on. 

From the investors' perspective, the trickle down effect can be costly. Any "issues" at the asset manager level directly impact fees paid by pension funds, their own asset allocation decisions, not to mention cash flow and funding status breach as possible forms of "valuation fall-out." Valuation is the proverbial four-letter word in investment risk management. Cause for consternation, valuation issues are often complex and demand rigor with respect to policy creation, implementation and review.

Being somewhat impolitic, yet wanting to convey an important message to an important audience of hedge fund professionals, I cited chapter and verse about valuation pitfalls from a pension fiduciary's perspective. Including the need to get private placement memorandums that address what and how the fund manager intends to assess the portfolio on a regular basis, I explained the rationale for use of an independent third party to either render opinions of value, or at the very least, conduct a valuation process check. Even when a hedge fund does not exceed the twenty-five percent ERISA money limit (pursuant to the Pension Protection Act of 2006), best practices abound for both the fund manager and the pension investors alike. Interviewing traders, along with the asset manager's Chief Risk Officer, about valuation policies and procedures is another good idea. If a fund has no functional risk manager, ask why. Interestingly, one person responded to my comments by declaring success at drafting sufficiently obtuse documents that would likely keep investor accusations at bay.

In today's Wall Street Journal, reporter Eleanor Laise tells readers that it's not just hedge funds caught in the valuation cross-hairs. Mutual funds have their own issues. For example, when a security is not frequently traded, multiple methods might generate disparate "fair value" estimates. Quotation quality runs the gamut from the use of stale prices to "accommodation quotes" offered by "friendly brokers." Time-of-day selection is another conundrum, especially in the case of non-U.S. securities or instruments such as highly customized derivatives. Laise adds that "valuation policies can vary substantially from fund to fund." In some situations, an independent outside firm provides prices. Elsewhere, internal models or broker-dealer quotes are used. (See "Funds Struggle with Pricing Pitfalls," Wall Street Journal, September 17, 2007.)

As I've written (and presented) many times before, plan sponsors who sit silently by, without grilling asset managers about their valuation policies and procedures, are asking for trouble. Pension fiduciaries have a duty to oversee external fund manager performance as relates to the stated risk tolerance and return goals. This includes a weighty discussion about price quotes, marking to market (or model) and provider quality. (Not being an attorney, plan sponsors should seek counsel for a precise assessment of their responsibilities.)

With new accounting rules on their way and a variety of significant valuation unknowns, subprime loan-related losses may look like a walk in the park. What we don't know can hurt!

Editor's Note:

Pension Governance, LLC has partnered with the National Association of Certified Valuation Analysts to develop a technical workshop on hedge fund valuation. Click here for a course description. Other programs are in the works. Click here to read more about our June 28, 2007 webinar about hedge fund valuation. (The recording and program materials are available for a modest fee.) If you want additional information about valuation training for your board, risk analysis or process checks, click here to drop us a line.




Can the Pension World Learn Something from Ayn Rand?

Love her or hate her (the woman), many feel that Ayn Rand's literacy legacy is beyond reproach. Author of best-selling books such as The Fountainhead, her main message is one of self-determinism and excellence of work. New York Times reporter describes the business glitterati who embrace her words to this day, including former Federal Reserve Chairman, Alan Greenspan, and a bevy of Fortune 500 CEOs. No wonder then that her books continue to sell. According to "Ayn Rand's Literature of Capitalism," Atlas Shrugged, published nearly fifty years ago, "is still drawing readers; it ranks 388th on’s best-seller list. 'Winning,' by John F. Welch Jr., at a breezy 384 pages, is No. 1,431."

So why does her work capture the hearts and minds of corporate scions and entrepreneurs alike and what could the pension world learn from Ms. Rand's work?

Addressing the first question, consider her many admirers who describe the inspiration they draw from reading this long (1,200+ pages) novel about the philosophical integrity and strength of characters such as Dagny Taggart (slated to be played by Angela Jolie in the Hollywood film version now underway), Hank Reardon and the all-time favorite, John Galt. Withstanding immense scrutiny and criticism from the entrenched bureaucracies, each fictional business persona fought steadfastly to create wealth by building a better mousetrap and to resist, at all costs, the temptation to be mediocre and do "just enough." 

Part of the book's appeal is its timelessness. As one Atlas Shrugged reviewer recently wrote, this 1957 book could just as easily have been written today. As Rand railed against excessive government regulation (influenced no doubt by her childhood experiences of living in Bolshevist Russia), contemporary critics decry the "excesses" of regulations such as SOX. Rand extolled the virtues (and urgent need) for bold leadership. She cautioned what would happen if the world fell from the shoulders of Atlas and the producers of high-quality products and services (without government help) left the "exploiters" to their own feeble devices. She impugned those who defrauded or otherwise took what did not belong to them. Her words resonate loud and clear in the aftermath of a wave of corporate fraud and scandals. She allowed only for strong property rights and proper commercial incentives (economic profit) to support a better quality of life for all in the form of unfettered markets. (How many innovations occur in the lands of despots and closed markets?) 

Should Atlas Shrugged be a guidebook for pension trustees? Asked in other ways, should benefit plan decision-makers focus on full transparency and accountability? Should fiduciaries bravely step up to the plate and make decisions that are in the interests of beneficiaries first and and always? Should plan sponsors map out a detailed plan (and follow it closely) to avoid conflicts of interest? Will plan sponsors adopt best practices that, in the short-run may cost more in terms of time and money, but in the long-run, create a better outcome for participants and shareholders alike? Should high-integrity fiduciaries be economically rewarded for their insight, commitment and diligence? Conversely, should those who accept sub-par quality of work be penalized?

If the answer to any or all of these questions is affirmative, the following quotes are for you.

"A creative man is motivated by the desire to achieve, not by the desire to beat others."

"Throughout the centuries there were men who took first steps, down new roads, armed with nothing but their own vision."

"The ladder of success is best climbed by stepping on the rungs of opportunity."

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.>>

Pension Risk - Did You Miss the Man in the Gorilla Suit?

While on a "sort of" vacation at a health spa in Arizona, this blog's author has treated herself to some "fun" reading, in between exercise classes and tending to business. As such, I came across an article in the Science Times section of the New York Times that I would have ordinarily set aside. Written about perception and reality, it seems to perfectly capture current happenings in pension land. Coincidentally, its August 21 publication date was the same day I fielded an invitation from CNBC to address whether pensions are taking on too much investment risk, where one goes to unearth information about pension investments and whether there is anything a plan participant or shareholder/taxpayer can do about "excess" pension risk. Unable to coordinate schedules, I will not appear on August 22. However, I encourage readers to download the Squawk Box video of the segment about pension risk. It promises to be interesting and timely.

Let me connect a few dots.

According to George Johnson, author of the aforementioned article, "Sleights of Mind," magicians succeed by exploiting what are described as cognitive illusions - "disguising one action as another, implying data that isn't there, taking advantage of how the brain fills in gaps." According to The Amazing Randi, this means that assumptions are often mistaken for facts.  Courtesy of the Visual Cognition Laboratory at the University of Illinois, a short video illustrates that observation skills are mixed. Only a few audience members who watch a film of basketball players - and then count how many times a particular team (categorized by shirt color) scores - ever notice the man in a gorilla suit walking on stage. (By the way, did you know that there is such a thing as National Gorilla Suit Day? Click here to learn more.)  

How this relates to pension risk is as follows. We know that billions of pension dollars are moving into derivatives, hedge funds, private equity funds, commodity pools, infrastructure, real estate investment trusts and so on. We know that some of these funds invest in economic interests that are "hard to value." We know that not every fund has a solid risk management policy. (Current newspaper headlines make that point abundantly clear.) We know that not every pension fiduciary has a finance background, let alone investment expertise. We know that finding out about a pension fund's holdings and liability risk drivers is often difficult. Form 5500 reports filed by ERISA funds are stale and overly general. Public funds might provide some information online or in response to the Freedom of Information Act but likely not on a frequent enough basis. Even financial footnotes are notorious for what they don't say about pension risk (on both the asset and liability side). It's rare if we even know who is making multi-million decisions about employee benefit plans, let alone be able to review their resume to gauge "suitable" knowledge and experience. We've blogged many times about meaningful disclosure, or more precisely, lack thereof. Click here to access past posts on this topic.

In a soon-to-be released survey about pension risk (co-developed by Pension Governance, LLC and the Society of Actuaries), there is clear evidence that pension fiduciaries perceive that they are doing a great job of vetting external managers with respect to risk management at the same time that the questions they profess to ask are overly simplistic. (Look for the executive summary to be released in mid-September.) Our forthcoming clearly indicates a surge in allegations of breach on the part of the investment fiduciary(ies).  Coincidence? Maybe not.

If the Fed and international central bankers are unable to quell investors' fears, we move into a recession and/or different asset classes get hit hard in terms of price volatility, life is going to be very tough for plan sponsors. Poor practices will likely come to light as large losses occur. Risk is truly a four-letter word. Absence of a rigorous risk identification, measurement and management system (policies, procedures, operations) will leave little room for defense.

 We are going to write much more on this topic in coming months. It's too important to ignore.

P.S. The nice photo comes to readers from the National Zoo.

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?"

Is Pension Governance a Stretch or a Rewarding Practice?

I love the challenge of an intermediate/advanced yoga class and attend as often as my schedule permits. Executing splits and flips like Gumby (am I dating myself here?) comes easy to me so the appeal is likely due to my comfort level in taking stretches to the limit.  Not surprisingly, many of us indulge in hobbies and sports that exploit an existing aptitude or strength. Is this a coincidence?

Do we adopt activities that help us enhance what we already do relatively well ("preaching to the choir")? If true, does that mean that companies with anemic corporate governance policies and practices are unlikely to "walk the pension governance walk" because it's too hard or different from the comfortable status quo?

It's a provocative idea.

At a time when new accounting rules and regulations have the potential to materially impact share price, it would be nice to know if corporate governance precedes pension governance or if the two activities are independent of each other. Indeed, quantifying how much companies care about their stewardship responsibilities is an attention-grabber.

Mounting evidence suggests that a solid reputation matters to the bottom line. According to a July 9, 2007 Business Week article, corporate reputation that is "able to deliver growth, attract top talent, and avoid ethical mishaps" may explain "much of the 30%-to-70% gap between the book value of most companies and their market capitalizations." This statement ignores some of the measurement issues that determine the book value - market value gap but merits review. Click here to access the article. (Registration may be required.)

  • How much is a good name worth and what exact governance policies and procedures tend to drive up stock prices?
  • Do investors care more about compliance or do they reward going beyond what is minimally required by law?
  • Is the relationship symmetric in the sense that stock issued by corporate baddies should be avoided at all costs while "hero equity" makes for good buys?

Wall Street Journal reporter Phred Dvorak quotes CEO of GovernanceMetrics International, Howard Sherman, as saying that "Good governance translates into trust, and trust determines what you're willing to pay for a company's shares." That makes sense but a further read of the July 2, 2007 article informs readers that ratings can and do vary. Audit Integrity and other rivals end up with a different "you go gal" list, in part because they employ alternative measures. Click here to read "Finding the Best Measure Of 'Corporate Citizenship' Governance Trackers Use Various Rating Criteria, Leaving Users Confused." (Registration may be required.)

One thing is certain. The business of governance is far from trivial. In a July 2, 2007 press release, Ethan Berman, chief executive officer of RiskMetrics explains the rationale for its announced acquisition of the Center for Research & Analysis ("CFRA"). Proud owner of proxy advisory firm Institutional Shareholder Services ("ISS"), RiskMetrics will name CFRA CEO Rich Leggett as head of ISS. Click here to read the full text announcement.

Note: In the spirit of full disclosure, Pension Governance, LLC currently resells CFRA products, including its PPM (Pension Portfolio Monitor) product. Click here to learn more. We are also developing a three-day in-person workshop about pension risk management with RiskMetrics. Click here to get more details about the debut September program.

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) Governance Webinar Emphasizes Growing Fiduciary Focus

On June 4, 2007, Dr. Susan M. Mangiero, president of Pension Governance, LLC moderated a panel of experts who waxed poetic about current challenges for 401(k) plan stewards, their advisors and money managers. Click here to order the recording if you missed the event. (Past events are listed by original date with older events shown first.)

All three speakers agreed that more pressure on fiduciaries is inevitable. Mr. Blaine F. Aikin, AIF®, CFA, CFP® and Managing Partner (Fiduciary360) said that many people either do not understand their responsibilities or fail to recognize how to discharge duties properly. As the investment world becomes more complex, this gap between statutory requirements and reality is likely to grow.

Mr. David J. Bauer, Partner (Casey, Quirk & Associates LLC) explained how the asset management industry is changing to accommodate an undeniable trend away from traditional plans in favor of 401(k) offerings. He added that the asset management industry struggles with what products they can offer that will help plan sponsors manage their fiduciary risk. Everyone opined that both buyers and sellers are still too heavily focused on performance and should be more aware of risk-adjusted returns at a minimum.  It was also agreed that adopting new products and strategies could increase fiduciary liability exposure if approved without demonstrating a solid understanding of risk.

Mr. David Vriesenga, Chief Rating Officer, with the Centre for Fiduciary Excellence, LLC spoke about the wave of new pension litigation cases. He explained that asset managers will continue to be targeted as defendants. Susan M. Mangiero commented that a forthcoming website,, has more than ninety (90) percent of its investment fiduciary cases cross-coded as alleged breach of duty. Scary stuff!

All speakers agreed that change is a constant. Challenges for plan sponsors and money managers abound. Part of that has to do with the heavy (literally and figuratively) nature of the Pension Protection Act (PPA) of 2006.

Note to Readers: Do you understand everything about the PPA? If not, you are far from alone.

From this blogger's perspective, the introduction of complex products could hurt more than help (given the current state of investment fiduciary literacy).

The audience was reminded that good process is everthing.

How true!

Hedge Fund Toolbox - Webinars for Pension Fiduciaries

At a time when pension funds explore new ways to buoy funding, billions of dollars are being allocated to hedge funds and fund of funds. Either direct or part of a portable alpha strategy, alternative investments offer potential benefits but often bring new challenges in the form of multi-tiered fees, valuation, leverage, transparency, short-selling, illiquidity and operational risk. Add to the mix the mandates of the Pension Protection Act of 2006 and one thing is clear. Pension fiduciaries are on the hook to demonstrate a solid understanding of the structural and financial characteristics of hedge funds and fund of funds and what could potentially cause problems if left unchecked.

To help pension decision-makers better understand this important area, Pension Governance, LLC has created the Hedge Fund ToolboxSM – a series of six webinars that focus on hedge fund economics, operations and legal considerations. Webinars are scheduled as follows:

•Hedge Fund Fees, Performance and Transparency (June 14, 2007)
•Hedge Fund Documentation, Background Checks, Enforcement and Litigation (June 19, 2007)
•Role of Consultants and Financial Advisors in Selecting Hedge Funds (June 26, 2007)
•Hedge Fund Valuation, Use of Side Pockets and New Accounting Rules (June 28, 2007)
•Hedge Fund Leverage, Use of Derivatives and Risk Management (July 10, 2007)
•Hedge Fund Operational Risk (July 12, 2007)

Register to attend the entire series or individual webinars. If you miss an event, recordings will be available for a modest fee for non-subscribers. Webinars are free to all Pension Governance subscribers. For more information, go to

About Pension Governance, LLC:
Pension Governance, LLC ( is an independent research and analysis company that focuses on benefit plan related investment risk, corporate strategy, valuation and accounting issues, with the fiduciary perspective in mind. Pension Governance, LLC is registered with CFA Institute as an Approved Provider of professional development programs.

Media Sponsors:
Pension Governance, LLC is proud to have Albourne Village (, ( and the National Association of Certified Valuation Analysts ( as media sponsors.

Pension Governance, LLC
Susan M. Mangiero, 203-261-5519

Paris Hilton Syndrome in Pension Land?

The latest news on Hilton heiress Paris is not good. Sentenced to forty-five days time for violating probation over a suspended license, she must report to jail on June 5. Click here for the story.

Ordinarily we wouldn't include a story about Paris Hilton except that it gives one pause for the following reason. In the last week, we've been busily focused on gathering news about litigation, enforcement and general stories about fraud in the financial world for and

Our conclusion? There are a lot of Paris Hilton wannabes out there if you think of her as a role model for "let them eat cake."

One can barely keep up with allegations of wrong doing - securities fraud, option backdating, imprudence of investment selection, lack of oversight, accounting "flexibility," incorrect valuations, conflicts of interest, absence of prudence, excess this, excess that. Many of the cases being filed allege fiduciary breach on the part of pension decision-makers or directors and officers or both.

To be VERY clear, allegations mean little until due process takes place and individuals have their day in court to argue their case. Additionally, we recognize that it's easy to hang our hat on the most egregious events, letting them taint everyone in the business. This too is an injustice for those folks who work diligently to execute best practices.

That said, however, the sheer number of news stories, allegations and complaints about financial bad acts is daunting to say the least. There are some who predict more to come, especially with so many millions of dollars at stake and increased exposure to complex securities and strategies.

We'd like to emphasize the importance of applauding the "good guys and gals." Let's learn lessons from demonstrated bad acts (for the sake of improvement).

For those who find it hard to resist temptation, keep in mind - The "pass the buck" mentality is unseemly and dangerous, especially when innocent bystanders stand to lose.

Eeny, Meeny, Miny, Mo - What Accounting Rules Do You Want?

Throughout my career, I've been fortunate to work on multi-disciplinary projects, many of which combined accounting with finance. It is my personal view that the two areas are integral to good business decision-making. Whether I've taught eager MBAs or corporate executives or managed analysts, I've cautioned people to look beyond the numbers, try to ascertain what information is missing and identify whether there are gaps between the accounting representation and potential economic profitability. Citing Columbo and the need to "be a good financial detective," I've suggested that (dare we say it?) accounting numbers can be illusory and therefore require a proper vetting. (By the way, my mention of the venerable television sleuth drew blank stares from the students so I had to switch to CSI characters instead.)

What does this mean for institutional investors?

Anyone committing funds to fixed income, equity or hybrids must have a solid understanding of what financial statements convey, and by extension, what they do not reflect. Assessing the quality of earnings (balance sheet) is often difficult. Rules are complex. Companies can have tremendous latitude in their reporting choices. This puts the onus on the investor to do a good job of comparing reported numbers against industry/company factors as they relate to predicting future expected cash flow or some other measure of economic profitability.

Always challenging, it may become more so now that the SEC has opened the door to foreign companies (and perhaps U.S. firms by extension) being able to choose which standards make sense for them. In his April 25 article, ("SEC to Mull Letting U.S. Companies Use International Accounting Rules"), Wall Street Journal reporter David Reilly writes: "The commission said it will begin soliciting comments this summer on a possible change allowing foreign companies registered with it to file financial results using international financial reporting standards, or IFRS. Currently, foreign companies that file with the SEC must reconcile their results to U.S. GAAP, a costly and time-consuming process that many companies, especially in Europe, want to do away with."

Whatever the choice, financial statement users have a tough job. First of all, analyzing industry peers could require even more attention being paid to HOW numbers are put together. Company X uses U.S. GAAP (Generally Accepted Accounting Principles) and Company Y uses an altogether different approach. You have two sets of numbers. Which one is right in terms of assessing economic potential?

Still a classic (but pay attention to new rules) is Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 2nd edition by Dr. Howard Shilit.  Also check out Michelle Leder's blog, Author of Financial Fine Print: Uncovering a Company's True Value," Leder drills down deep into the footnotes that many ignore.

On the pension accounting front, European firms are still reeling from rigorous rules. The adoption of new financial strategies and plan redesign (or perhaps termination) are not uncommon in some countries such as the UK. Stateside, FAS 158 is getting lots of attention with much more to come.

If people ignored accounting numbers and chose instead to focus on economic forecasts alone (i.e. take a fundamental approach to investing that emphasizes competitive structure, operating environment, etc), that would be one thing. However,  there is extensive research that suggests that companies DO behave a certain way in response to accounting rules.

Therefore, as companies get to choose accounting rules by which they will abide, investors must:

1. Understand what the different standards mean in terms of an accounting - economics "gap"

2. Identify whether a reporting entity is perversely changing its behavior to game a particular rule and buoy its numbers

3. Roll up those shirt sleeves and sleuth away. What you see may not be what you get!

Uncle Sam Wants You ... To Get a Fiduciary Advisor Audit

San Diego is hopping with over three hundred financial professionals attending the FI360 Annual Conference. Topics on the agenda include fiduciary requirements in the aftermath of the Pension Protection Act of 2006 (PPA), trends in fiduciary liability insurance claims, prudent investment fiduciary practices and 401(k) plan economics.

One item in particular - the PPA-required audit of  "eligible investment advice arrangements" (EIAA) - is taking center stage. By definition, an EIAA is "an arrangement that, among other things, provides that any fees (including any commission or other compensation) received by the fiduciary adviser for investment advice or with respect to the sale, holding, or acquisition of any security or other property for purposes of investment of plan assets do not vary depending on the basis of any investment option selected." Click here to read Field Assistance Bulletin No. 2007-01 (U.S. Department of Labor - February 2, 2007).

In response, the Centre for Fiduciary Excellence just announced an audit and certification program to ‘fiduciary advisers’ as defined by the PPA, "who intend to serve in EIAA’s. The fiduciary adviser certification program is supplemental to the existing CEFEX Investment Advisor Certification based on the fiduciary practices published by Fiduciary360 of Sewickley, PA. These practices are defined in the Fiduciary 360 publication "Prudent Practices for Investment Advisors" which was reviewed by Reish, Luftman Reicher & Cohen of Los Angeles, CA, and edited by the American Institute of Certified Public Accountants (AICPA)."

Read more by opening the press release file.

PG Editor's Note: The Centre for Fiduciary Excellence and the Foundation for Fiduciary Studies (and its affiliate, FI360) are partners with Pension Governance, LLC (owner of this blog). We all agree on a similar mission - to empower plan sponsors and their vendors and agents by providing educational information about fiduciary investment issues and promoting transparency about investment fiduciary practices. Click here to learn more about all of our partners.

House Approves Say on Pay - What About Pension Empowerment?

Hot off the press, the U.S. House of Representatives says okay to amending the Securities Exchange Act of 1934 to provide stockholders more power in approving executive pay. Click here to read the Shareholder Vote on Executive Compensation Act. Arguably the rationale is to empower shareholders to veto executive pay packages deemed "excessive." One can argue about the efficacy of the legislation (and likely will). However, it begs an interesting question for citizens of pension land.

What type of say do they get about the operation of a defined contribution and/or defined benefit plan? How can they corral perceived conflicts of interest, alleged misdeeds and/or questionable decisions? On the flip side, how can they say "bravo" to effective investment stewards, perhaps voting for better financial rewards and job title recognition for good do bees (honest players)?

The answer - Not much!

This topic arose in 2005 when I was asked to appear on CNN Financial to talk about United Airlines. The anchor asked me to cite steps that defined benefit plan participants could take when they know a company is encountering financial difficulties and want to exit the plan or change their share of the investment mix. When I explained to the producer that employees are extremely limited in being able to exert influence over the management of the trust (other than through litigation, and only after losses have occurred), we all agreed that a gloomy message may not make for great ratings.

Sob - my fifteen seconds of fame, evaporated in a moment of candor.

So now that Congress is taking steps to empower shareholders, why not tackle the same for plan participants? Yes, post-Enron, reforms were made. No, to this day, plan participants still have little influence on whether a plan is well run or not.

Part of the problem arises because information is scattered, often obtuse when available and sometimes contradictory (depending on the source). And for those on the outside looking in, access to documents such as the Summary Plan Description (SPD) is nil.

Just an aside - This issue of limited beneficiary control extends to defined contribution plans as well.

Hence, plan participants MUST depend on the integrity, knowledge, experience and solid intentions of the persons in charge.

So to all of those plan beneficiaries everywhere - ask yourself this. How much do you know about the people in charge? Would you like to know more?

To plan stewards - If you aren't providing transparency about everyone with authority to make decisions about plan design and investment governance, wouldn't it be a good idea to do so? Besides creating a sense of "I don't want to hide anything," you open the door to suggestions for improvement and possibly close a door to litigation or otherwise unwanted scrutiny.

Why wait?
Continue Reading...

Pension Risk Management Tipping Point

I am the author of a book entitled Risk Management for Pensions, Endowments and Foundations (John Wiley & Sons, 2005). A primer about risk management (no math by design), the feedback has been gratifying. I'm particularly proud of the comments citing ease of use. (The book is replete with examples, checklists and references).

However, it's no Da Vinci Code in terms of sales. While I'd like to write a sequel at some point, few are competing for the honor and no one is knocking down my door to buy the movie rights. (You can visit our online bookstore at - Products, Books for what we think constitutes a good readling list.) True, it's non-fiction and written for a limited audience. Yet one wonders why, in today's benefits climate, more people aren't fast and furiously laying pen to paper to describe how to tackle what is arguably one of the most important topics in pension land - risk management. If there is a single message I can impart to those who will listen, it is this.

ANYONE involved in pension investing is a de facto risk manager. Believe it. You are.

Whether focused on the asset or liability side (or both), risk is an integral part of financial management. Those who deny this truism expose themselves to possible trouble down the road. Personal and professional liability aside, plan sponsors who passively manage risk (whether defined benefit or defined contribution) through ignorance or benign neglect invite unwelcome scrutiny. Unless they are lucky, litigation, economic loss and/or damaging headlines are high probability events.

Besides, plan sponsors who give risk management short shrift lose a precious opportunity to improve things. An effective process forces a plan sponsor to identify, measure and control risk on an ongoing basis. Taking inventory (in terms of uncovering sources of risk) enables plan sponsors to make meaningful changes. Lower costs or enhanced diversification are two of many possible benefits associated with the activity of collecting and analyzing data as part of the identification of risk drivers.

So a natural question arises.

Why don't more plan sponsors pay attention to risk management, whether for themselves or as part of hiring, reviewing and perhaps firing money managers and consultants? Asked another way, what is the tipping point beyond which risk management becomes front and center at meetings of board members, trustees, investment committees and so on?

Here are a few thoughts.

1. Based on the preliminary results of the pension risk management survey now underway, and co-sponsored by Pension Governance, LLC and the Society of Actuaries, there seems to be a HUGE gap between belief and reality. Many respondents say they actively pay attention to risk management. At the same time, they cite limited or no use of risk metrics other than standard deviation and/or correlation. (We'll talk about limitations of basic risk metrics elsewhere.) How can you improve on something you think you are already doing well?

2. Many plan sponsors are tasked with benefits-related work as an add-on to their regular job. Often, there is little organizational incentive for them to excel. In a way, it's a lose-lose proposition. They assume significant fiduciary liability with little or no recognition in the form of additional money, better title or other types of perquisites. At the same time, if they do a bad job, there is no escape. It's all downside. Sadly, there is so much perceived ambiguity about what constitutes a "good" job that it's often difficult to hold someone accountable. (Note the term "perceived" versus "real.")

3. Not all attorneys (litigators and transactional) feel comfortable with finance concepts, let alone financial risk management. That knowledge void arguably makes it easier to let risk control gaps slide unless, or until, an egregious act occurs.

4. Establishing a financial risk management process is seldom fun (or at least sort of enjoyable) for most people. It is often a complex activity that requires copious amounts of money, time, concentration and energy, especially if a plan's investment mix (DB or DC) extends to multiple asset classes. Moreover, benchmarking the process, and making appropriate changes thereafter, likewise consumes large chunks of time and money. Is it any wonder then that its ranking on one's "to do" list plummets in the absence of a strong risk culture?

5. When market conditions are "good" and benefit costs decline as a result, people tend to get lulled into false security. Instead of focusing on structural issues, it's easier to breath a sigh of relief and say "problem solved." Alas, markets change all the time and putting off the inevitable is hardly a smart move.

So what's the tipping point that has everyone wearing "I'm a risk manager" button? Certainly lower interest rates and/or an anemic equity sector are factors, as is regulation. A few recent surveys cite mandates as a central force in encouraging, sometimes forcing, plan sponsors to radically revise their asset allocation strategies and focus on plan risk.

Most folks think we're moving closer to the pension risk management tipping point. I agree but counter that movement is relative. Until (and hopefully not "unless") plan sponsors recognize the URGENT need for financial risk management, investment stewards remain vulnerable on many counts and that is not a good thing for anyone!

Pension Governance, LLC Launches New Website Devoted to Pension Risk Issues

Pension Governance, LLC is proud to announce the launch of a new website for pension investment fiduciaries. In what is believed to be a unique online information portal devoted to pension investment risk and valuation issues, and reflecting original content from practitioners, combines independent analysis and research with commentary about urgent issues affecting both defined contribution and defined benefit plans.

At a time when pension finance dominates headlines around the world, investment committee members, treasurers, CFOs and trustees are confronted with a slew of new challenges and a need to “connect the pension governance dots.”

The primary goal is to empower investment fiduciaries with objective educational information about relevant issues before they commit millions of dollars and countless hours to a particular strategy. Dr. Susan M. Mangiero, president of Pension Governance, LLC and author of Risk Management for Pensions, Endowments and Foundations, adds, “We want to create a meaningful conversation about pressing and oft-complex investment and risk issues that are not going to go away any time soon. We have put together a top-notch group of contributing editors from a variety of disciplines, including law, insurance, treasury, alternative investments and corporate governance. Our strategic partners join us in our efforts to promote investment fiduciary education and best practices.”

In addition to the Knowledge Center Library, includes interesting features such as Pension Chat (interviews with industry leaders), Courthouse Corner and Fiduciary Focus. Soon to come is the Pension Parade of Horribles, a source of information about bad practices and lessons learned.

Subscribers can read annotated online articles from a variety of news sources, access research team members via Ask Professor Pension, download original content from expert practitioners, receive Pension Risk AlertSM and attend webinars for no additional fee. A forthcoming webinar is a June 4 discussion about 401(k) plan governance in the aftermath of the Pension Protection Act of 2006. Another webinar, part of the Hedge Fund Toolbox - a series of discussions from the pension fiduciary perspective - is a May 15 discussion about fees, documentation and key person background checks. Many other webinars about a variety of pension topics such as valuation, liability-driven investing and performance analytics are in the works and will be announced shortly.

Web designer Dawn Barson, co-founder of think creative group, llc, describes the care taken to build an infrastructure that permits Pension Governance editors maximum flexibility. “Knowing how much the editors want to keep the site fresh, we worked hard to build a robust administrative console so that new features can be added all the time.” Additional programming is already underway, with many more functions being designed to help investment fiduciaries access information and analysis quickly, easily and in a cost-effective manner.

With over thirty years of experience in the pension industry, Dan Carter, Pension Governance Vice President of Business Development, describes a sea change in the challenges that confront fiduciaries. “There is so much to know in this field and getting it from independent sources is critical as never before.” Mangiero concurs, “There is no shortage of content. We’ll be adding to the site all the time. People should check back often for updates.”

Visitors can sign up for a free two-week trial subscription by going to and are encouraged to submit requests and comments to

Economics, the SEC and Amnesia

According to the SEC website, a complaint has been launched against an economics professor and several funds he controlled. In "SEC v. Albert E. Parish, Jr., Parish Economics LLC and Summerville Hard Assets LLC, Civil Action No. 2:07-cv-00919-DCN" (D. S. C., April 5, 2007), the SEC charges fraud.

Shortly after the filing, in a somewhat sad turn of events, news outlets report a claim of amnesia. See "Fund Manager Offers Memorable Response to SEC's Fraud Charges" by Suzanne M. Schafer (Associated Press), April 7, 2007. Click here to read the article (one of many).

What's ironic is that the professor, apparently oft-cited as an economic forecasting expert, was quoted in May 2006 as happy with the Enron verdict. "It certainly provides a boost of faith." Click here to read the text of "Local businessman, economists pleased by Enron verdict," The Sun News, May 26, 2006.

Everyone should have their proper day in court but it does seem odd that $134 million is allegedly missing and a "smart" man suffers forgetfulness.

Nevertheless, in the spirit of lessons learned, plan sponsors can be reminded (for that matter, all investors should pay heed) that background checks of key players is desirable, nay essential.

The Case of the Mistaken Jellybean and Pension Food for Thought


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

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

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

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

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

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

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

California Dreaming About Pension Conflicts of Interest

A few months ago, California Governor Schwarzenegger created the Public Employee Post-Employment Benefits Commission. Tasked with identifying the nature of their $49 billion unfunded liability for state retirement programs, this group must submit a report to the Governor and state legislators by January 1, 2008 that (a) quantifies unfunded post-employment health care and dental benefits for which the state is obliged to pay (b) assesses and compares possible solutions to address unfunded liabilities and (c) recommends which course of action makes sense. Click here to read the official press release about the Commission. Click here to access the names, titles and affiliations of the original appointees.

A few weeks ago, San Francisco Chronicle reporter Greg Lucas wrote that two of the dozen members, including the head of the commission, have business ties with California pension funds. Not surprisingly, eyebrows raised. In response, "Schwarzenegger administration officials and CalPERS -- the nation's largest institutional investor -- say there is no conflict between the two commission members' private business ties and their role on the commission, but some independent observers say the connection could harm the credibility of the panel's recommendations." Click here to read "Pension reform panelists' ties to firms questioned" (San Francisco Chronicle - March 8, 2007).

Call me crazy but doesn't it make sense to remove any doubt about the ability for commission members to render an impartial analysis? The persons in question may be the most honest of men. I don't know them personally. What I do know is that this type of news is likely to be yet another nail in the coffin of uncomplicated pension reform. I've spoken to countless taxpayers across this great country who are starting to wake up and smell the cappuccino. They are not happy about the prospect of soaring taxes to fund these benefits and even less satisfied with the way change is proceeding.

Kudos to Governor Schwarzenegger for creating the Commission in the first place. However, for a task so important -- huge dollars at stake and millions of plan participants  -- why keep dreaming that no one will mind a few conflicts of interest, perceived or actual? Continue Reading...

Pension Regulation - Driving Under the Influence of a Muffin

I live in a lovely town of about 18,000 people. Thankfully, there is little crime other than an occasional act of mailbox vandalism or the theft of holiday inflatables. Credit good-hearted people and a vigilant police force, especially it seems, when it comes to driving. I know this firsthand because I was pulled over the other day for DUIM (driving under the influence of a muffin, blueberry in this case). Apparently, I was swerving slightly to the right even as I drove a cautious twenty-five miles per hour. When I rolled down my window to say hello, the police officer saw the muffin, gave me a warning not to eat while driving and said he was on the lookout for DUI's (driving under the influence). After I thanked him, a bit shaken for the experience, I got to thinking.

Can rules be too rigid and what happens when you cross the line ever so slightly?

These thoughts are not unique to me. The topic du jour in financial policy circles is whether regulation is too heavy-handed and thereby impedes capital market innovation. Just last week, wonk wizard and New York Times columnist Ben Stein queried the wisdom of the so-called Paulson Committee in seeking to redress the "onerous" audit standards attached to Sarbanes-Oxley. (See "So Many Millions, So Little Body Armor", January 7, 2007)

Citing a plethora of option problems on Corporate Boulevard, he asks: "Isn't backdating precisely an example of a failure of internal controls? Haven't we just found out that internal controls are far too lax, not too strict?"

The same question, applied to benefit plan governance, is apt. At a whopping 908 pages, the Pension Protection Act of 2006 has spawned a new industry to decipher the nooks and crannies of this far from simple regulation. Too soon to assess the fallout, one ponders. Could it be too much? If so, what can take its place?

I'm a big believer in industry self-regulation but that begs yet another question. Who represents the "pension industry" and do the players speak with one voice? Arguably, HR has a different perspective than Audit or Treasury. Without a unified world view about what pension governance means, it's hard to imagine a system without mandatory regulation.

Free marketeers will say this is troublesome. The regulatory burden is far from trivial. Real dollars are redirected to activities that may not reap rewards. Perverse incentives arise and the law of unintended consequences results. Look what happened in the UK. In the aftermath of FRS 17, a large number of companies terminated defined benefit plans as quickly as possible.

Then there is the issue of compliance. Many suggest that pension regulatory changes are outpacing the industry's ability to keep up. Does this put a fiduciary in harm's way (the equivalent of swerving slightly while eating a muffin)? You think you're doing the right thing but get "pulled over" nonetheless. How can a decision-maker protect herself (himself) from mounting personal and professional liability?

Here's to pension governance solutions - the sooner the better!

Paper Clip Theory of Pension Governance

In speaking to a colleague about managerial excesses the other day, I relayed the story of something that took place years ago. I was in college and worked as a bank teller in the afternoons and opened new accounts on Saturdays. The woman assigned to provide on-the-job training (long retired I'm sure) chided me for tossing a paperclip. "I'm a shareholder of this bank and every penny counts. We just don't throw away paperclips."

At the time, she struck me as old-fashioned and picky. Of course, when you're twenty, I suppose everyone seems un-cool.

What continues to amaze me is that I recall that event as clearly as if it had just happened. Her comment was an epiphany of sorts. This woman was not an executive. She wasn't even a bank officer. She was a secretary (administrative assistant in today's parlance). She wasn't responsible for the budget. No one counted supplies. Certainly one abandoned clip couldn't mean much. Yet her words resonate still. With skin in the game, she had a compelling motivation to be thrifty and encourage others to follow suit.

The relevance to pension governance is striking. When fiduciaries do not have a vested interest in adhering to best practices, will they be tempted instead to follow the path of least resistance? What motivates an individual to be a good steward of other people's money? Is it an increasing awareness of personal and professional liability that moves people to act or a concern that doing the right thing counts most?

A few days ago, I asked several financial advisors why they thought so many lawsuits focus on 401(k) fees rather than defined benefit plan fees. One response speaks volumes. "It's the company's money with DB plans but when employees pay, there is less managerial concern." Cynical or a reflection of the existing risk-reward system? Fiduciary responsibilities apply to both DB and DC plans. Yet decision-makers tend to feel pain faster and more fully when DB plan assets underperform and their compensation is tied to share price, cash flow or budget variance.

Experts agree that pension governance is AWOL at more than a few companies and statehouses. Why is that? As I wrote in Executive Decision last year, incentives are everything. Reward people for good behavior and you get what you pay for. The converse is true as well.

For those already in the vanguard with respect to effective investment fiduciary practices, kudos and keep up the great work. For those doing the equivalent of the pension paperclip toss, a good New Year's resolution is to stop.

P.S. Click here if you'd like to read "Do Fiduciaries Need Better Incentives to Make the Retirement System Work?"

Pension Problem Solving - Building the Team

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

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

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

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

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

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

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

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

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

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

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

Second Chance for Pension Fiduciaries Too?

In case you missed it, Donald Trump, co-owner of the Miss USA pageant, just announced that the reigning titleholder will be given a second chance, despite questions about her behavior, post-win.

In stark contrast, former CEO of Pfizer has been forced into early retirement "in part because of investor anger about his rich retirement benefits." Hang on to your hats. It's written that SEC disclosures describe truly golden years for this former executive - an $83 million pension and nearly $78 million in other deferred compensation. No second chance here but with that much in the bank, one might ask who cares. (For additional information about pensions at the top, see "Executive Paywatch.")

Well, reputation and legacy issues are important to some. Then there is the possibility that allegations of excess compensation could result in legal action. According to New York Times reporter Eric Dash, Fannie Mae's primary regulator has filed suit against top executives in an effort to take back more than $200 million in bonus payouts. Notwithstanding questions about recent accounting restatements, the former head received a "pension valued around $25 million." (See "Fannie Mae Ex-Officers Sued by U.S." by Eric Dash, December 19, 2006.)

So what's the takeaway for pension fiduciaries?

Second chances are a gift, allowing those in charge to improve current practices, stave off trouble and be good, or better, stewards on behalf of plan participants. However, not everyone gets a chance to go round again, begging a logical question.

Why not get it right from the outset?

Do We Need a Dr. Phil for Pensions?

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

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

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

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

This is no time to argue over turf!

Life of a Benefits Manager Heading Into 2007?

An homage to Norwegian painter Edvard Munch (born on December 12, 1863) Google's same day banner is reprinted herein. A reminder perhaps that 2007 is sure to create some agita for more than a few benefits managers and other related decision-makers?

Here are a few reasons for upset:

1. New pension accounting rules for companies

2. New OPEB (other post-employment benefit) accounting rules for municipalities

3. Forthcoming derivative accounting rules for public funds, similar to FAS 133 for companies (Remember that derivatives are getting more attention as possible elements of a liability-driven investment strategy.)

4. Anticipated Congressional oversight hearings about pension funds, 401(k) fees and hedge funds

5. Stated SEC consideration of rule changes as they apply to alternative investments (and possible impact on pension funds investing in hedge funds)

6. Proposed Form 5500 disclosure rule changes regarding service providers, fees and other elements of pension investing

7. Continued taxpayer upset regarding the cost of municipal benefits and a desire for lower property and state income taxes

8. Continued escalation in pension litigation

9. Continued focus on plan design and expected impact on an organization's cash flow

10. Continued focus on the Sarbanes Oxley - ERISA (corporate governance-pension governance) link

11. Anticipated guidance about default options for defined contribution plans (and related fiduciary impact)

12. The remaining 900+ pages of the Pension Protection Act of 2006

13. Projected worsening of the Social Security situation and likely impact on financing of the "three-legged" stool

14. Continued longevity patterns (good for retirees but expensive for employers)

15. Projected lower interest rates that increase liabilities

16. Anticipated pressure on asset returns

17. International pension woes and possible contagion for the U.S.

18. Predicted health care benefit cost increases that make pensions pale in comparison

19. Continued need to attract and retain scarce pool of talented workers with good benefits while keeping costs low

20. Continued scrutiny from ERISA and D&O liability insurance underwriters (and related impact on coverage and cost of coverage)

The good news is that there are lots of possible solutions but make no mistake. The new year will definitely entail major changes and challenges for all.

Who is Responsible for the Benefits Issue?

A question that arises again and again centers on who "owns" the benefits issue at a particular organization. There is increasing evidence that board members and C-level executives are becoming more involved, if not so already. One gentleman told me that his board has met four times this year about pension issues alone.

This comports with the notion that pension, health care and other types of deferred compensation benefit programs can significantly impact a corporate or government employer's financial health, lower debt ratings, diminish (or enhance) employee productivity and influence the ability to attract and retain skilled workers, already in short supply.

So it is with great pleasure that I will be part of a panel that addresses the ownership issue, enterprise risk management and "pension tensions" (though the issues extend to other benefit programs as well).

Entitled "Strategies for Managing Diverse Constituencies: Shareholders, Employees, Beneficiaries and Management" and part of an exciting risk management conference, sponsored by Pensions & Investments, the panel plans to address a host of important governance and financial issues.

Ms. Fern Jones, CFA is the conference moderator. Managing Partner of FJ Corp/THS Ltd, Jones will lead the following panelists in what is sure to be a lively discussion. Speakers include:

Mr. James H. Norman
Managing Director
Deutsche Asset Management

Dr. Susan M. Mangiero, CFA, AVA, FRM and Accredited Investment Fiduciary Analyst
Managing Member
BVA, LLC and Pension Governance, LLC

Mr. Jim M. Voytko
President & COO
R.V. Kuhns & Associates, Inc.

Bad Boy Syndrome and Governance

Ever have a sleepless night? You find yourself watching late night television and pondering whether to call overseas clients in their time zone as a way to score points. If so, you may have come across a police reality show known simply as COPS. According to the Fox Television website, COPS is "still one of the most popular television shows on the air," leading one to wonder about the national fascination with crime and disgrace.

Unfortunately, there never seems to be a shortage of bad boys and gals who flaunt the law. The temptation of easy money is too intoxicating for some, ensuring that the saga will likely continue for a long time to come.

Just recently, former Enron CEO Jeffrey Skilling was sentenced to twenty-four years over a corporate scandal that has received significant press attention and prompted a new wave of governance standards and rules. New York Times reporter Alexei Barrionuevo describes Skilling's sentence as slightly shorter than the twenty-five years metered out to Bernie J. Ebbers, former head of WorldCom "who was sentenced to 25 years last year for his role in the $11 billion fraud that led to that company's collapse." (In the spirit of full disclosure, let me confess to owning some two hundred shares of Enron common stock.)

Financial Times reporter Kevin Allison writes that David Kreinberg, former CFO of voicemail software company Converse, "became the first top executive to plead guilty to conspiracy and securities fraud in connection with options backdating." Rumour has it that others are in the hot seat and have hired criminal lawyers.

Financial wrongdoing accounts for an entire industry of specialists. Benchmark Financial Services bills itself as an expert "in investigations of pension fraud, money management abuses and wrongdoing involving securities brokerages and pension investment consultants," adding that their "investigations frequently focus upon illegal or unethical business practices that are commonplace in the securities brokerage, asset management and consulting industries, as well as hidden or poorly disclosed financial arrangements between vendors to pensions."

Another organization, Corporate Resolutions, focuses on fraud, money laundering, risk management and competitive intelligence. President Ken Springer, a Certified Fraud Examiner and former special agent of the Federal Bureau of Investigation, provides an interesting update in the company's monthly newsletter about security issues.

Notwithstanding their efforts, some interesting questions come to mind with respect to how people respond to problems in pension land and elsewhere.

1. Does news about white collar criminal punishments deter others from misdeeds?

2. What type and magnitude of loss roils people to the point of lobbying for changes in the system, with the goal of minimizing future mishaps?

3. Does the avoidance of shame play a role in keeping financial abuses to a minimum? (How many rogue traders are now making a nice living as commentators, security consultants or well-published writers?)

4. What is the fine line between fraud and unethical practices?

5. Who is responsible for early detection of fraud within an organization?

6. What can investors and/or plan beneficiaries do to protect themselves from fraud and "ethically challenged" decision-makers?

Taking a pro-active approach can go a long way to calming jitters. For pension fiduciaries, providing transparency about the investment process, including choice of money managers and related vendors, is huge.

Why then is it often difficult to get meaningful information about a plan and how it is being managed? Why do we pay attention to the bad boys and gals instead of more emphatically rewarding all the good players?

Got Pension Governance?

Advertising executives in moo moo land must be deliriously happy. Who would have thought that Hollywood stars donning a calcium mustache would get such good press? Maybe it's time to recruit them to this side of the fence. With headlines dominated by stories about pension malaise, couldn't an ad campaign help to allay any fears about a possible funding meltdown and make pension governance seem cool, hip and happening?

Growing interest in knowing what works best for defined benefit and contribution plans alike is terrific news indeed but there's more work ahead.

How should good behavior be monetized? We know how to calculate damages associated with alleged misdeeds that get adjudicated in court or via liability insurance claims. Why then is it so hard to quantify adherence to high standards?

What motivates some organizations to stop at minimum compliance versus others who go the extra mile? Is it because we're accustomed to measuring explicit costs instead of foregone opportunities? Is it because knowing who owns the retirement issue is anyone's guess? (As I wrote in "Searching for Hidden Treasure", identifying names of pension fiduciaries is often a Herculean task.)

Is pension governance seen as nerdy, unimportant or too hard to understand? Do pension decision-makers feel that time and money spent on best practices is unappreciated and therefore not worthwhile? Do they feel protected by anonymity and/or fiduciary insurance policies with a hefty face value? Are they overwhelmed with their full-time jobs and not able to focus on the "extra" pension work? (This applies to the large number of individuals for whom playing the role of pension fiduciary is a job duty add-on.)

At the very least, transparency is a step in the right direction towards good pension governance, yet something that eludes many of those not directly involved with a particular plan.

Anecdotally, when I was writing Risk Management for Pensions, Endowments and Foundations, getting information about institutional investors was often like pulling teeth. Three years of research later, I was still hard pressed to get more than a few people to go on record about their policies and procedures.

One of several exceptions was Mr. Gary Findlay, now Executive Director of the Missouri State Employees' Retirement System. He freely shared information about governance, organizational structure and investment policy. The website is worth a visit for what appears to be a bounty of information. As Findlay offers, once a legal framework exists, "well developed governance policies that establish objectives, identify roles and responsibilities, and align interests are critical to the pursuit of excellence."

Shouldn't good policies be boldly announced to the public as a badge of honor? What is there to hide? At the very least, publicizing a fund's best practices could go a long way to demonstrating procedural prudence. Additionally, it could possibly minimize the chances of unhappy parties seeking redress later on, rather than allowing for the benefit of doubt.

So the question remains.

Got pension governance?

If not, why not?

Editor's Note: A few references to disclosure articles are provided below.

1. "Form 5500 Revisions" (explanation of what still remains unknown)

2. "Pension Risk: What We Don't Know Can Hurt" (first published in Mann on the Street, 2006)

3. "Deciphering Risk Management Disclosures" (first published in AFP Exchange, March/April 2004)

Pensions and Derivatives, the "D" Word

Are derivative instruments a recipe for disaster, an integral part of effective investment management or something in between? As explained in "Derivatives: The $270 Trillion Gorilla", meteoric growth around the world speaks volumes. At the same time, the incremental risks are real and cannot be dismissed.

Financial News reporter Renee Schultes writes that few fund managers "have the operational infrastructure and expertise to trade outside the listed and less-liquid listed derivatives market." (See "Managers struggle with OTC derivatives trading", Financial News, September 25, 2006.) Financial Times journalists Paul J. Davies, Gillian Tett and Saskia Scholtes chronicle efforts to address operational issues related to derivatives. (See "Derivatives dealers' tough match", Financial Times, September 25, 2006.)

New accounting rules and regulations encourage a paradigm shift that emphasizes risk analysis. Liability-driven investing is the new "it" topic and, by extension, derivatives are getting a serious look by public and ERISA pension fiduciaries alike. Money managers use derivative instruments as well for a variety of reasons such as transforming cash flows, leveraging exposure to a particular asset class or hedging. The Towers Group, a research and consulting firm, reports that "buy-side derivatives usage" is expected to "explode, bolstered by the shift to electronic trading, search for alpha, and more accommodating regulations (such as changes to ERISA and the adoption of the Prudent Investor Rule), which allows derivatives usage in pension funds and institutional money management." (See "Growth in Derivatives to Have Profound Impact on Wall Street Firms", September 18, 2006.)

The ultimate question is whether the expected benefits outweigh the costs. I wrote an entire book on this topic. Written for fiduciaries and related parties, Risk Management for Pension Funds, Endowments, and Foundations is a primer about the risks and benefits of derivatives and, more broadly, risk identification, measurement and control. I could easily write a second book about the topic. There is so much to say.

That is why subsequent posts will address the topic of derivatives, and the fiduciary implications of their use.

For those who want to read more, here are links to earlier blog posts and some articles I've written about risk management.

1. "Derivatives Get the Blame"

2. "Operational Risk and Derivatives"

3. "Derivatives Valuation: One Size Does Not Fit All"

4. "Pension Risk Management: What We Don't Know Can Hurt"

5. "Five Keys to Risk and Risk Management"

You can find lots more by going to our online library. You may also be interested in receiving our complimentary ezine about risk and valuation. Click here to sign up. (A link to our privacy policy is at the same URL.)

Cheating and Pension Land

In "MBA students are 'biggest cheats'" Financial Times reporter Della Bradshaw conveys disappointing survey results that graduate students cheat. Business ranks first with fifty-six percent of those polled "admitting to misdemeanours such as using crib notes in exams, plagiarism and downloading essays from the web."

The news is not good elsewhere on campus. The survey, soon to be published in the Academy of Management Learning and Education journal, reveals that fifty-four percent of engineering students and fifty percent of science majors admit to cheating. Thirty-nine per cent of respondents in the humanities say "I do".

According to a report of the Ethics Education Task Force to the AACSB's International Board of Directors, "many schools have initiated new ethics instruction" but "more work must be done." (Note: The Association to Advance Collegiate Schools of Business is self-described as a "not-for-profit corporation of educational institutions, corporations and other organizations devoted to the promotion and improvement of higher education in business administration and management.")

Having taught the occasional MBA or executive MBA course, my experience has been positive (in fact extremely positive in terms of student motivation and integrity). That said, if the survey results hold true, some faculty members, somewhere, are either doing a lot of looking the other way or simply not catching the wrongdoers.

So why is this outcome something to ponder in pension land?

Pensions are set up as trusts. Stewards in charge of retirement plans are entrusted to make good decision on behalf of beneficiaries. Fiduciary duties speak to trust and loyalty. Employees trust that promises made will be kept.

Not every graduate student cheats and to imply otherwise would be grossly unjust. However, a culture of cheating does not bode well if future leaders are pulled from their ranks.

Who is responsible for ethical behavior and when does it start? How can we ensure that pension trustees and other fiduciaries are trustworthy, not just being honest but taking their responsibilities seriously?

Are there lots of capable and high integrity fiduciaries? Absolutely? Are there some who are ethically challenged? What do you think?

How can market participants self-police? How can we make good ethics the voluntary standard (assuming it is not already the case)? How can the system reward the good guys and gals and weed out the others? At the very least, what system best avoids penalizing fiduciaries when they try to do what they think is right, even if it means upsetting the apple cart? What is the role of regulation? What is the role of market structure in terms of transparency?

These and many other questions deserve a vigorous debate.

"What is left when honor is lost?"
Publilius Syrus

Does Pension Size Matter?

Pension size can be defined in a variety of ways such as assets under management (AUM), number of participants and so on. For investment analysis purposes, let's use AUM as the determinant of size and then discuss whether pension policies and practices vary across funds.

1. Are large funds more astute?

2. How does the available budget for larger funds impact their ability to hire specialists and engage in arguably more complex analyses?

3. Do governance practices improve or deteriorate as AUM grow?

4. Do plan participants expect more from a larger fund?

5. Can a fund be "too large" and lose the ability to respond quickly to new opportunities?

6. Are fees significantly lower for large funds, and if so, what threshhold constitutes "large"?

7. Do tiny funds struggle with transaction minimums? Can they afford to buy a comprehensive performance analysis technology system?

8. Is there a "too big to fail" doctrine for pensions, similar to what the banking industry has experienced?

9. Is the asset allocation mix materially different for big versus small funds?

10. Are larger funds more or less likely to examine alternative investments, and if so, why?

We could go on but you get the idea. While database vendors frequently categorize plans by assets under management, how many researchers examine the role of size with respect to pension best (worst) practices? What do they conclude?

There are published empirical answers to some of these questions.

We welcome your comments!

Can Poor Pension Governance Land You in Jail?

In a riveting and timely article, senior Greenberg Traurig ERISA attorney Jeff Mamorsky provides a serious wake-up call to pension fiduciaries everywhere. (Click here to read "Is Today's Pension Plan Environment Cause for Concern?", CEO Magazine, August 2006.)

Mamorsky chronicles the parade of corporate horribles in the U.S. that eventually led to the Sarbanes-Oxley Act of 2002 (SOX). He points out the irony that "All this happened in the USA despite the fact that the federal pension law, the Employee Retirement Income Security Act of 1974 (ERISA), contains rules that require plan sponsors to establish internal control procedures to monitor compliance with the fiduciary responsibility requirements of ERISA."

In the spirit of the stick winning over the carrot, Mamorsky adds that "These rules were in some cases not followed since there were few real teeth in the law. It took SOX with its draconian certification penalties and ERISA's 'white collar' criminal penalty provisions to make plan sponsors take pension governance more seriously."

Emphasizing the nature of personal liability for pension fiduciaries, the article explains the critical, and undeniable, connection between SOX compliance and pension governance. In a rather ominous statement, Mamorsky warns "This liability has increased as the result of legislation such as SOX that requires a public company CEO, CFO or other responsible fiduciary to certify the establishment and adequacy of 'disclosure controls and procedures' relating to material items in the annual financial report. What companies sometimes overlook is that this SOX section 404 management assessment of the adequacy of internal control procedures requirement applies to pension and benefit expenses."

If you aren't scared at this point in the article, he goes on to describe SOX sanctions of money and jail - "$2m and up to ten years' imprisonment for non-wilful ($5m / up to 20 years' imprisonment for wilful) certification of any statement that does not comply with SOX requirements." Then there is the matter of heightened IRS scrutiny of pension plan governance (or lack thereof), a rise in litigation and general upset about the topics du jour, pension funding gaps, rescinded benefits and so on.

Mamorsky concludes that the rest of the world is starting to feel the pinch as the UK and other countries address governance as an important element of the "global pension world."

As an aside, our sister company, Pension Governance, LLC is soon to launch a pension litigation database, chock full of analyses and trends. We had planned to launch earlier but found many more cases than we originally anticipated.

A harbinger of days ahead in pension governance land?

Pension Scandal

If you haven't read about what has been happening in San Diego with respect to its pension plan, a trip to is well worth a visit. There you will find a slew of documents and articles about the many problems that have now led to indictments and a $1.4 billion estimated pension deficit, which in turn have led to restricted capital market access for what some consultants describe as "Enron-by the Sea". In the final audit report, made public just a few days ago, one of its authors, Arthur Levitt Jr., former SEC chairman, emphasized the need for fundamental reform.

Some of the reviewers' recommendations are listed below. Notice the item about financial statement certification, a la Sarbanes Oxley. Along these lines, this author suggests that decision-makers at least ponder the idea of a pension "financial expert", analogous to SOX audit committee rules. While an honest debate about what constitutes appropriate educational and experience requirements for such a position is a must, the hiring process could encourage objective and independent outsiders to join.

Optimists say that trouble begets reform and that lessons learned go a long way to help others avoid losses. That would be a good thing!

Excerpted Suggestions:

Creation of a permanent three-member Audit Committee empowered to retain the City's independent auditors and to inquire into all aspects of City governance and financial reporting, as well as establish and monitor "whistleblower" complaints.

Two members should be independent of the City and have significant financial expertise in accounting, auditing and financial reporting.

The appointment of a Monitor to oversee implementation of the remedial actions being recommended. The Monitor should make quarterly reports to the City's permanent Audit Committee and to the Division of Enforcement of the SEC. These reports should also be available to the citizens of San Diego.

Accountability for fiscal decision-making and disclosure must be built into the City's financial reporting system. To do this, the City must strengthen the role and accountability of the Chief Financial Officer who should be the individual primarily responsible and accountable for the accuracy and timeliness of the City's financial management, reporting and disclosure functions. Assisting the CFO should be a Comptroller, with experience in government accounting, and a Director of Financial Reporting, with specific responsibility for preparation of the City's financial statements. The CFO should also supervise a Director of Budget and Planning to be responsible for assisting the CFO in budget preparation and financial analysis. The Mayor and the CFO should annually include with the City's financial statements a statement of the City's responsibility for establishing and maintaining an effective system of internal control over financial reporting. Similarly, certain heads of each City unit, including its pension board, should be required to certify their stand-alone financial statements.

The City should provide increased pension system independence, accountability, and transparency, through, among other things, the reduction of the pension system board to nine members, five of whom should be mayoral appointees. The chairman of the pension board and its principal executive should be required to include a signed management report addressing accuracy of the Comprehensive Annual Financial Report, effectiveness of internal controls, and other relevant issues.

The City should support the Mayor's initiative to develop a five-year financial plan for City government. Each year the City Council should require a final budget that compares actual to budgeted performance, accompanied by written explanations by each department manager for variances.

Do As I Say, Not As I Do

Mr. Jerry Kalish provides a novel suggestion in response to a July 13, 2006 post about legislative attempts to curb dividend payouts for underfunded pension plans. (See "Dividends, Pensions and California Chaos".)

Creator of Retirement Plan Blog, Jerry writes the following:

"The proposed bill - and the politics behind it - conveniently ignores the massive unfunded pension liabilities in California, e.g, the California State Teachers' Retirement System faces a $24 billion unfunded pension liability.

But we got them beat in my home state of Illinois which at $35 billion has the largest unfunded pension obligation in the country. The Fitch Rating service released a "negative outlook" for Illinois finances - one of only three negative outlooks issued by the rating service in its review of the states. The other two? Louisiana dealing with the aftermath of Hurricanes Katrina and Rita and Michigan dealing with massive problems in the automobile industry.

Um! Should there should be a law that says no more salary increases for state legislators until pension liabilities are met?"

Give the man a bow for an astute observation.

Others have provided novel solutions to the ubiquitous problem of do as I say, not as I do. In 1993, then Michigan state representative Greg Kaza proposed that legislators' pensions be taxed at the state income tax rate, similar to what they required of others. The result? A few months later, the state ceased taxing private pensions. Greg continues to dazzle as executive director of the Arkansas Policy Foundation.

Taking the Pension Pulse

Take a five question quiz and see if others agree with you about the state of the pension system.

Governance Update: Personal Liability on the Rise?

Voltaire once wrote "No snowflake in an avalanche ever feels responsible". In the aftermath of some of the more "infamous" corporate scandals, one wonders if this is what the french philosopher had in mind. Unfortunately, for the directors seeking refuge in the opinions of others, hiding may become more difficult.

A recent article in Canadian Underwriter describes several trends that seem to be gaining ground: (a) plaintiffs' demand that directors personally contribute in the event of litigation-related payouts and (b) attempts by insurance underwriters to rescind Directors & Officers coverage "upon learning of fraudulently-reported financial statements".

At the same time, KPMG's Integrity Survey 2005-2006 suggest that things are improving. "Although the level of observed misconduct has remained constant, employees reported that
the conditions that facilitate management's ability to prevent, detect, and respond to fraud and misconduct have improved since 2000. For example, pressure to engage in misconduct is down, and confidence in reporting concerns to management is up."

In a related article, attendance at Directors College was way up this year, with a star-studded roster of speakers addressing many topics including several sessions about D&O insurance.

Pension Fund Hiring - Start of a New Trend?

According to its website, the Canadian Pension Plan Investment Board is in a hiring mode. Responsible for investing funds received from the Canada Pension Plan, the now C$98 billion fund is seeking several dozen qualified people in the areas of investment and risk management.

A few months ago, a major UK newspaper cited the dearth of qualified pension investment and risk management professionals at the same time that expertise is urgently needed. Is this the start of a hiring trend? Are pension experts suddenly in demand? If so, why? Some likely reasons include:

1. New retirement plan regulations

2. Changed accounting rules

3. More complex investment strategies

4. Recognition that investment and risk management go hand in hand

5. Notion that hiring seasoned staff can minimize fiduciary breach exposure

6. Explosive growth in pension litigation

We may be in for a bumpy road. If true that there are insufficient experts available who can connect the pension risk dots, it will be difficult to make meaningful changes in a cost-effective manner.

Do You Have Something to Say About Pension Risk and Governance?

Two motivations account for the existence of a desire to inform and facilitate a meaningful dialogue about pension risk and governance issues, especially at a time when so many changes are taking place around the world. Based on the insightful and encouraging comments we've received from blog readers, we seem to be on the right track. Thank you everyone!

We'd like to make the blog more interactive and are therefore inviting readers to comment. We'll publish the comments at least once a month and hopefully more often.

Here are a few suggested topics. We'll add more along the way.

If you are so inclined, simply send your comments to If you prefer to remain anonymous, please state such so we know not to publish your name. If you want others to contact you, please include an email address in your comments.(We reserve the right to edit but we will try to preserve the essence of your comments.)

1. What do you think is the difference between asset-liability management and liability-driven investing and why do you think so few pension funds are employing these techniques (though the trend points towards increased use)?

2. Do fiduciaries have a duty to hedge market risk?

3. Should fiduciaries be required to have X number of years of investment education and experience in order to serve?

Dysfunctionality in Pension Land

In a recent speech to the National Association for Business Economists, Bradley D. Belt laid out some cold, hard facts. Executive Director of the Pension Benefit Guaranty Corporation (PBGC) for a few more weeks, Belt described employee compensation as potentially "a rich source of profits" when companies book expected returns that exceed realized returns on invested assets. He points out that pension funds are assuming more risk at the same time that the practice of smoothing allows companies to stretch out pension losses over time.

Who will pay for existing, and accepted, practices that widen the gap between economic and accounting reality?

1. Taxpayers in the event of a bailout of PBGC?

2. Investors who see the value of their portfolio fall due to pension problems?

3. Employees who may lose benefits or even their jobs?

So if things are so bad, why isn't there more screaming in the streets?

Part of the seemingly benign response to one headline after another about the loss of pensions and other retirement benefits is that ownership of the issue is so diffuse.

Who is responsible for setting things right?

1. CEO's and CFO's who want as little as possible involvement regarding benefit-related decisions?

2. Attorneys who rally for damages in a court of law?

3. Congressional legislators who are often accused of doing too much too late?

4. Regulators who face limited resources and competing jurisdictions?

5. Employees who seldom feel they can make a difference?

6. Plan fiduciaries who may not even acknowledge themselves as such, let alone show that they carry out their duties willingly and effectively?

7. Auditors, actuaries, consultants?

Until true "owners" of the pension issue are identified and someone steps up to the plate (or they are forced to do so), the hot coals are likely to be passed from one party to the next.

Not a happy thought!

Searching for Hidden Treasure

I've spent the last few weeks trying to uncover information about the retirement plan decision-makers at various companies. I'm willing to pay money for this information. Why?

Simply put, I want to know who has responsibility for making multi-million dollar decisions that affect thousands of employees and retirees. Once identified, I'd like to read their bios, understand how they were selected, read about how they are evaluated and identify to whom they report.

Unfortunately, my quest has provided scant results. Here is a summary of what I know. (I welcome comments about possible data sources.)

1. There is no universally accepted organizational structure to determine who is in charge of recommending and deciding on what retirement benefits to offer those outside the executive suite.

2. When a retirement benefits committee exists, it goes by different names, some of which are listed below.

(a) Master Retirement Committee
(b) Trust Selection Committee
(c) Saving and Investment Plan Committee
(d) Pension Committee
(e) Retirement Board
(f) Fiduciary Committee
(g) Benefits Committee
(h) Deferred Compensation Board
(i) Compensation and Employee Benefits Committee

3. Titles of benefits-related decision-makers vary. Some examples follow.

(a) 401K Board Chairperson
(b) Benefits Director
(c) Benefits and Compensation Director
(d) Benefits Administrator
(e) Head of Human Resources
(f) Compensation Committee Chairperson

4. The SEC has proposed a significant overhaul of reporting rules as relates to executive compensation and compensation committees. It appears to be silent with respect to the compensation decision-making process for employees below C-level.

5. Page 1 of Form 5500 requires the identification of the plan sponsor and plan administrator, respectively. Schedule P to Form 5500 requires the signature of a fiduciary and the name of a trustee or custodian. (According to the U.S. Department of Labor website: "Each year, pension and welfare benefit plans generally are required to file an annual return/report regarding their financial condition, investments, and operations. The annual reporting requirement is generally satisfied by filing the Form 5500 Annual Return/Report of Employee Benefit Plan and any required attachments.")

6. ERISA mandates the distribution of a Summary Plan Description (SPD) to each plan participant and beneficiary currently receiving benefits. Required information includes "the name, title and address of the principal place of business of each trustee of the plan". Education and experience are not mandatory disclosure items.

The bottom line is 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.

Hunting for treasure shouldn't be this hard!

Practice What You Preach

Mutual funds, hedge funds, pension funds, life insurance companies, endowments and foundations play an increasingly important role in helping companies and governments raise capital. According to the New York Stock Exchange Fact Book, they account for nearly fifty percent of equity investment holdings. Their clout is unmistakable. When these lions roar, we listen. And what are they saying now?

A new survey, conducted by Institutional Shareholder Services, reports that a majority of institutional investors cite corporate governance as a high priority and a key determinant of returns. In releasing revised principles of corporate governance in 2004, the OECD acknowledged the vital role that large institutions play with respect to oversight and shareholder activism, adding that "For investors to exercise their shareholder rights, they need to be properly informed. This calls for a minimum level of transparency and disclosure on the part of companies." (Transparency and its positive effect on liquidity, depth and other barometers of efficacy is widely documented in the market microstructure literature.)

The irony is breath-taking. At the same time that institutional investors are seeking more and better information about what companies do and when, getting them to open their own books is like pulling teeth. How many things do we need to know about institutional investors such as pension plans? Let us count the ways.

1. How are fiduciaries selected, evaluated and compensated?
2. What factors determine plan design?
3. Who assesses the independence of money managers and consultants?
4. What is included in the investment policy statement?
5. Who writes the investment policy statement?
6. When is it revised and on what basis?
7. What is the relationship between executive and non-executive benefits?
8. What is the risk composition of assets in a defined benefit plan?
9. How does portfolio mix affect the asset-liability management strategy?
10. Do plan sponsors consider a 401K "pseudo liability" when determining choices?
11. Does a plan's administration reflect a best practices approach?
12. Do executives understand the link between ERISA fiduciary duties and Sarbanes-Oxley?

The list is long. We could easily put together a list of "must know" questions for each category of institutional investor to include hedge funds, mutual funds and so on.

Institutional investors can be real heroes by providing the same quality of transparency they seek elsewhere. Statutory reforms are helpful but often do not go far enough or result in unintended outcomes. Voluntary disclosure is another avenue. In the case of defined benefit plans, early warning information could allay fears about a worst case scenario. Moreover, ample disclosure similarly signals management's intent on being as above board as possible, thereby creating corporate goodwill at a time when employees and shareholders really need encouragement.

An important question remains. Why don't institutional investors provide more information about themselves now? If the answer is that it is too costly to gather and report information to interested parties, consider the upside. Might liability and litigation costs recede with better disclosure?

Executive Compensation and Everybody Else

Pension fiduciaries inside a company have a tough life. They are tasked with making multi-million dollar decisions at the same time that they are seldom rewarded for the time and energy required to do an excellent job. What's odd is that so few people pay attention to all things "fiduciary" in terms of how these individuals get selected, compensated and evaluated for performance. In contrast, extensive time and money is expended in an effort to determine the optimal pay package for an executive (including pension benefits), how to gauge leadership acumen and when to pull the chord on the golden parachute.

Several questions come to mind. Are fiduciaries getting paid enough? Do they have an appropriate educational and experiential background to decide how to properly select and review external money managers, assess operational controls, determine suitability of 401(k) investment choices, evaluate plan performance, interpret actuarial estimates of explicit and pseudo liabilities, identify hidden risks and otherwise carry out their fiduciary duties? How should they be rewarded for a job well done? Should the job of pension fiduciary be a full-time position? Should information about who serves as a pension fiduciary be made public to shareholders and other interested parties? Should C-level executives and board members be made more accountable for pension fiduciary recruiting and decision-making? Is it time for a "fiduciary expert" that parallels the notion of a financial expert, a la Sarbanes Oxley?

There are a few training programs that specifically address retirement fiduciary concerns. Stanford University Law School has Fiduciary College and Peter Hapgood, president of Public Pensions Online, is working on the municipal side with several public fund organizations. The U.S. Department of Labor established "Getting It Right" several years ago.

Notwithstanding these efforts, I think it would be fair to say that fiduciary management has a long way to go. If there was ever a time when the issue of defined benefit and defined contribution plan stewardship deserves examination, now is that time. With so much at stake, why wait?

For a discussion of the topic of fiduciary compensation, see "Do Fiduciaries Need Better Incentives to Make the Retirement System Work?", co-authored with Wayne Miller (Executive Decision Magazine, January/February 2006).