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:
- "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz (American Bankruptcy Institute Journal, July 2014);
- "Pension Plans: The $20 Trillion Elephant in the (Valuation) Room" by Dr. Susan Mangiero (Business Valuation Resources, July 2013);
- "Pension risk, governance and CFO liability" by Susan Mangiero (Journal of Corporate Treasury Management, 2012); and
- "The Plan That Didn't Bark" by Susan Mangiero (CFA Magazine, March-April 2008).
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.