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.

Susan Mangiero of Fiduciary Leadership, LLC Earns the "Professional Plan Consultant" (PPC) Credential

Trumbull, CT (November 6, 2014) – Dr. Susan Mangiero is pleased to announce her designation by Financial Service Standards, a division of fi360, Inc. (Pittsburgh, PA) in the area of retirement plan consulting.  She is the recipient of this specialized designation known as the Professional Plan Consultant or PPC.

Recent regulatory changes to the qualified retirement plan industry have sparked an urgency to ensure that retirement plan service professionals have specialized training and resources to help sponsors meet their fiduciary obligations and a means of documenting that prudent practices are being followed in the management of an employer-sponsored plan.  Those professionals that help retirement plan fiduciaries and their counsel are seeking accreditation and certification to demonstrate a high level of knowledge and the ability to provide sponsors with the tools necessary to manage their plan effectively.

The Professional Plan Consultant™ designation was developed by Financial Service Standards with a goal of helping professionals that work with employer-sponsored retirement plans specialize in this increasingly regulated niche of the financial industry.  Program graduates must sit for either a two-day training class or complete the equivalent web-based training program, pass a comprehensive final exam, sign off on the FSS Code of Ethics, and commit to ongoing training in retirement plan management. 

Susan Mangiero is a Managing Director with Fiduciary Leadership, LLC. She is a CFA charterholder, certified Financial Risk Manager and Accredited Investment Fiduciary AnalystTM. Dr. Mangiero has been working within the investment management industry for over twenty years. She provides a variety of investment risk governance and valuation services to attorneys, regulators, asset managers, investment committees and other types of fiduciaries. Services include board training, business intelligence surveys, calculation of damages for dispute resolution purposes, expert witness testimony, investment best practices research, white papers, financial model reviews and procedural prudence assessments. She is the author of Risk Management for Pensions, Endowments and Foundations and the lead contributor to the award-winning blog, www.pensionriskmatters.com.

According to Dr. Mangiero, she is proud and excited to have received this distinguished designation. "It requires industry experience and reflects my dedication to raising the service standards in the retirement plan industry, whether for 401(k) plans, defined benefit ("pension") plans, Employee Stock Ownership Plans ("ESOP"s) or other types of employee benefit arrangements. This designation is an indicator that a professional has added to her knowledge and can access unique tools and resources that can help plan sponsors meet certain industry requirements."

Sharon Pivirotto, Founder & Managing Director of Financial Service Standards of Pittsburgh congratulates Dr. Mangiero on this achievement and "applauds her initiative to help customers plan, build and maintain a successful and compliant company-sponsored retirement plan. This kind of commitment and service approach ultimately means better retirements for many employees."

The 40lk Service Training Program, sponsored by Financial Service Standards, has been accepted for 12.5 continuing education credits by the Certified Financial Planner Board of Standards Inc. The PPC designation is listed on the FINRA website.

Fiduciary Leadership, LLC is an investment risk governance and forensic economic analysis consulting company. Clients include asset managers, transactional attorneys, litigation attorneys, regulators and institutional investors.

Pension Risk Matters Cited As Newsletter That 401k Advisors Should Read

As I have stated many times, this blog was created more than seven years as a labor of love (excuse the pun). Objectives include the following: (a) encouraging conversations about the importance of investment risk governance for U.S. and non-U.S. retirement plans (b) sharing educational surveys and research papers and (c) describing and interpreting important trends in the industry. Our readership continues to grow and it is my pleasure to dedicate time to the care and feeding of PensionRiskMatters.com as the primary contributor.

Accolades about the website are appreciated, especially from individuals who themselves dedicate considerable time to the topics of fiduciary education and best practices. I am proud to learn that Ms. Sharon Pivirotto lists PensionRiskMatters.com as one of "12 Newsletters All 401k Advisors Should Read" (Linkedin.com, October 24, 2014), referring to our site as "a very robust blog with articles covering regulatory, risk, and practice management topics for pension professionals."

Thank you for the recognition Sharon. As co-founder of Financial Service Standards (now part of the fi360 family), your opinion counts.

Thanks too for the individuals who have generously provided time and energy since this pension blog launched in 2006. Readers tell us that they value the chance to read interviews with industry thought leaders and have access to various studies and insights about critical retirement industry topics.

To our readers, please accept our gratitude for your interest and helpful comments.

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 contact@fiduciaryleadership.com 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.

Foreign Corrupt Practices Act and Implications for Institutional Investors

For those who don't know, I am the lead contributor to an investment compliance blog known as Good Risk Governance Pays. I created this second blog as a way to showcase investment issues that had a wider reach than just the pension fund community. While I strive to publish different education-focused analyses on each blog, sometimes there are topics that I believe would be of interest to both sets of readers. A recent article that I co-wrote is one example. Entitled "Avoiding FCPA Liability by Tightening Internal Controls: Considerations for Institutional Investors and Corporate Counsel" (The Corporate Counselor, September 2014), Mr. H. David Kotz and Dr. Susan Mangiero explain the basics of the Foreign Corrupt Practice Act. Examples and links to reference materials are included, along with a discussion as to why this topic should be of critical importance to pension funds and other types of institutional investors. Click to download a text version of "Avoiding FCPA Liability by Tightening Internal Controls: Considerations for Institutional Investors and Corporate Counsel."

A Pension Rock and a Hard Place

Not surprisingly, the conversations about pension reform are getting louder and taking place more often. Calls for further transparency, political posturing and headlines regarding the link between municipal debt service and questions about the contractual nature of pension IOUs are three of the many factors that are being hotly debated, with no end in sight. Interested parties are invited to read "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz, CPA. Published by the American Bankruptcy Institute, the authors bring attention to the fact that courts are making decisions about critical issues such as whether creditors, in distress, can move ahead of public pension plan participants. Click here to read more about the article and the connection between retirement plan promises and municipal bond credit risk.

Others are approaching the topic of public and corporate pension plan obligations from the perspective of younger workers being asked to subsidize seniors. In "Why We Need to Change the Conversation about Pension Reform" (Financial Analysts Journal, 2014), Keith Ambachtsheer writes that "Pension plan sustainability requires intergenerational fairness." He adds that suggestions such as lengthening the time over which an unfunded liability can be amortized or assuming more investment risk "effectively pass the problem on to the next generation once again."

Legislators are slowing starting to act, in large part because they cannot afford not to do so. According to Wall Street Journal reporter Josh Dawsey, New Jersey Governor Chris Christie has spent his summer with constituents, holding town hall meetings to explain his decisions about pension plan funding. See "Christie Plays Pension Issue Beyond N.J." (August 9-10, 2014). On August 1, 2014, he signed Executive Order 161 to facilitate the creation of a special group that is tasked with making recommendations to his office about tackling "these ever growing entitlement costs."

New Jersey is not alone. Prairie State politicos are attempting to forge reform. In "4 reasons you should care about pension reform in Illinois" (July 25, 2014, Chicago Sun Times reporter Sydney Lawson explains that the $175.7 billion owed to participants and bond investors will cost every taxpayer about $43,000 if paid today. According to its website, the Better Government Association estimates that replenishing numerous police and fire retirement plans in Cook County will "require tax hikes, service cuts or both."

The Big Apple retirement crisis  is no less massive. New York Times journalists David W. Chen and Mary Williams Walsh write that "the city's pension hole just keeps getting bigger, forcing progressively more significant cutbacks in municipal programs and services every year." A smaller asset base and decision-making that occurs across five separately managed funds are described as trouble spots for Mayer Bill de Blasio. Noteworthy is the mention of an investigation by Benjamin M. Lawsky, head of the Department of Financial Services, that seeks to understand how service providers were selected to work with New York City pension plans and the level of compensation they receive. See "New York City Pension System Is Strained by Costs and Politics" (August 3, 2014).

Curious about the extent of this New York City and New York State focused investigation, I asked one of my researchers to file a Freedom of Information Act request in order to obtain details. We are awaiting the receipt of meaningful results. So far, we are being told that information is not available to send. What is known so far, based on an October 8, 2013 letter from Superintendent Lawsky to Comptroller of the State of New York, Thomas P. DiNapoli, is that questions will or are being asked about retirement plan enterprise risk management and "[c]ontrols to prevent conflicts of interest, as well as the use of consultants, advisory councils and other similar structures."

Pandering for votes by promising lots of goodies may not be a successful recipe for reforming pensions that need help. Moreover, judges are in the driver's seat once a dispute about contractual status is litigated. In a recent opinion, a federal court of appeals ruling about lowering cost of living adjustments overturned an earlier decision that such an action was unconstitutional. See "Baltimore wins round in battle over police, firefighters pension reform" (The Daily Record, August 6, 2014). Click to download the August 6, 2014 opinion in Cherry v. Mayor and City Council of Baltimore, No. 13-1007, 4th U.S. Circuit Court of Appeals.

Like Homer's Odysseus who was caught between Scylla and Charybdis, policy-makers, union leaders and heads of tax groups are navigating some very rough waters indeed. We have not seen the end of these heated debates about what to do with underfunded municipal pension plans. Trying to align interests of seemingly disparate groups is only the beginning.

ACI ERISA Litigation Conference - New York City

I have the pleasure of announcing that Fiduciary Leadership, LLC is one of the sponsors of this recurring educational conference. For a limited time only, I am told that interested parties can register early and receive a discount. Contact Mr. Joseph Gallagher at 212-352-3220, extension 5511, for details.

Besides two full days of interesting and timely presentations, the American Conference Institute conference about ERISA litigation gives attendees a chance to hear different perspectives. Scheduled speakers include investment experts, corporate counsel, defense litigators, plaintiffs' counsel, class action specialists, judges and fiduciary liability insurance executives, respectively.

Click to download the ACI ERISA Litigation Conference agenda or take a peek at the list of topics as shown below:

  • Fifth Third v. Dudenhoeffer and the Impact of the Decision on the Future of Stock Drop Case and Litigation Regarding Plan Investments;
  • ERISA Class Actions Post-Dukes and Comcast: Standing, Commonality, Releases and Arbitration Agreements, Monetary Classes, Issue Certification, Certification of “Class Of Plans”, Class Action Experts and Halliburton, and More;
  • The Affordable Care Act, Health Care Reform and New Claims and Defenses in Workforce Realignment Litigation;
  • 401(k) Fee Cases: Current Litigation Landscape and Recent Decisions, Evolving Defense Strategies, DOL Enforcement Initiatives, Impact of Tussey and Tibble, Excessive Fund Fees, and More;
  • Retiree Health and Welfare Benefits: M&G Polymers USA, LLC v. Tackett and the Yard-Man Presumption;
  • Multiemployer Pension Plan Withdrawal Liability;
  • Independent Fiduciaries: Working with Them to Manage Plan Assets, Handle Administrative Functions and Authorize Transactions; and the Latest Claims Involving Failure to Monitor Independent Fiduciaries and/or Keep Them Informed;
  • ESOP: New and Emerging Trends in Private Company ESOP Litigation, Lessons Learned from Recent Decisions in ESOP Cases, and the Latest on DOL Investigations and Enforcement Priorities;
  • Benefit Claims Litigation: the Latest on ERISA-Specific Case Tracks Aimed at Discovery Disputes, Attorney Fees Post-Hardt, Limitation Periods in Plans, Addressing Requests for Evidence Outside of the Record in “Conflict” Situations, Judicial Review of Claims Decisions and the Battle Over Discretion, and More;
  • Fiduciary Liability Insurance: Assessing Current Coverage and Future Needs & Strategic Litigation and Settlement Considerations;
  • New Trends in Church Plan Litigation;
  • New Trends in Top Hat Plans: The Latest Litigation Risks;
  • Public Pension Developments and Trends; and
  • Ethical Issues That Arise in ERISA Litigation: The Fiduciary Exception to Attorney-Client Privilege, the Question of Who Really Is Your Client.

In April of this year, I presented at the ACI ERISA Litigation conference in Chicago about working effectively with an economic and/or fiduciary expert. Click to access the slides entitled "Expert Coordination: Working With Financial and Fiduciary Experts" by Attorney Joseph M. Callow, Jr. (Keating Muething & Klekamp PLL), Attorney Ronald S. Kravitz (Shepherd, Finkelman, Miller & Shah, LLP) and Dr. Susan Mangiero (Fiduciary Leadership, LLC). For a recap of this session, click to read "ERISA Litigation and Use of Economic and Fiduciary Experts" (May 5, 2014).

On October 28, 2014, I will be part of a panel about public pension fund issues. I will be joined by Attorney Elaine C. Greenberg (Orrick, Herrington & Sutcliffe LLP) and Attorney H. Douglas Hinson (Alston & Bird LLP). Topics we plan to cover are shown below:

  • Overview of Public Pension Market - Scope, Size and Funding Levels;
  • Government Plan Hot Button Issues;
  • Pension Reform:
  • Pension Obligations and Bankruptcy, With Discussion of Detroit;
  • SEC Enforcement Actions, With Discussion About the State of Illinois;
  • New Accounting and Financial Reporting Standards;
  • Use of Derivatives by Municipal Pension Plans;
  • Fiduciary Breaches as They Relate to Due Diligence; and
  • Suggestions for Risk Mitigation and Best Practices.

I hope to see you in the Big Apple in a few months!

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:

Moderator:

  • Dr. Susan Mangiero, Managing Director, Fiduciary Leadership

Panelists:

  • 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!

Golf Course RFPs and Other Mistakes That Retirement Plan Fiduciaries Make

Litigation attorney and uber ERISA blogger, Steve Rosenberg, recently shared his slide deck entitled "Common Mistakes of Plan Sponsors."  Part of an educational presentation to U.S. Department of Labor examiners, Steve addressed the importance of getting competitive bids, thoroughly investigating service providers before selecting one or more individuals or firms and avoiding what he coins the "Golf Course RFP." He worries that members of a retirement plan investment committee could bypass best practices in selecting a bank, advisor, consultant, third party administrator and/or asset manager and instead rely too much on a vendor's brand name or overly friendly relationship with someone who works at a company before considered. Deciding to hire someone on the basis of a handshake over a glass of beer or chatting on the greens is ill-advised if it shortcuts proper research about the abilities of a service provider, fees they intend to charge and whether their offerings are likely to meet the needs of a particular defined contribution or defined benefit plan.

Steve warns about other mistakes to avoid, including the identification of who will do what tasks, how often they will be performed and whether a service provider contracts to be a fiduciary. In particular, he frets that members of an ERISA plan committee may select a provider to serve as an investment fiduciary and then incorrectly assume that they have passed the baton and no longer have any liability.

Other errors he cites are part of what he calls the "ESOP Private Company Valuation Problem." These concerns include "insufficient reliance on outside experts" and not hiring an independent fiduciary to oversee a transaction when there are clear conflicts of interest or further expertise is needed.

Interested readers may want to investigate the following educational resources to include:

ERISA Litigation and Use of Economic and Fiduciary Experts

On April 29, 2014, I presented with Attorney Joseph Callow and Attorney Ron Kravitz on the topic of case management and the use of experts. Having spoken several times at this relevant periodic conference about ERISA litigation for the American Conference Institute, I heard attorneys repeatedly emphasize the importance of good experts without ever going into much detail. As a result, I volunteered to develop this program and am appreciative of the time and knowledge of my esteemed panelists. Entitled "Expert Coordination: Working With Financial and Fiduciary Experts," the workshop consisted of a perspective from the defense, courtesy of Keating Muething & Klekamp PLL partner, Joseph M. Callow. The plaintiff's view about the use of experts was presented by Shepherd, Finkelman, Miller & Shah, LLP partner, Attorney Ronald S. Kravitz. I offered comments from the perspective of someone who has served as a testifying expert, calculated damages and provided forensic analyses as a behind-the-scenes economist.

Notably, our individual observations about what makes for a smooth process were similar, including the reality of tight litigation budgets and the desires of corporate General Counsel or Litigation Counsel to avoid excessively large invoices. We gave multiple suggestions. For example, one way to keep costs in check is to engage an expert on an incremental analysis basis with each work segment tied to a limited scope. Another idea is for an expert and supporting number crunchers to put together a budget. This disciplined projection of time and related fees, created at the outset, allows counsel and expert to share expectations about what is needed and how much money it will take to accomplish those tasks. Moreover, if an insurance company has to approve defense costs, putting together a detailed budget can help to avoid delays. The creation of a budget is likewise a tool for deciding whether a litigator and/or expert can accept a flat fee for non-testimony work. If the scope of work is ill-defined, it will be harder for either counsel or expert or both to commit to a flat fee at the same time that corporate clients favor the flat fee approach.

We all agreed that the engaging attorney and his or her litigation team reap benefits when the expert provides suggestions about further data and document evaluation. In other words, the attorneys look to the expert to be pro-active and helpful with respect to fact gathering and subsequent assessment of said information. Working with an expert who is relatively easy-going as opposed to an individual with a "difficult" personality is a plus for the legal team.

Timing matters too. If an expert is hired early on, he or she can make recommendations during discovery. If the expert is engaged too late in the process and discovery has ended, that expert's report could be adversely impacted in terms of completeness. 

Attorney Callow repeatedly urged litigators to do their homework when selecting an expert. Attorney Kravitz talked about the high price tag of having to replace an expert, once hired, in the event of poor quality work. In reply to my question about the use of lawyers as fiduciary experts, both gentlemen said that judges may not be receptive to having an attorney testify. If an attorney is needed, the better approach is to have that person serve as a consultant.

Click to access the April 29, 2014 slides for our session about the use of financial and fiduciary experts for ERISA litigation matters. Click here to read "Tips From the Experts: Working Effectively With A Financial Expert Witness" by Dr. Susan Mangiero and published by the American Bar Association.

Pension Risk Blog Is Eight Years Old

Wow - eight years and counting since I started www.PensionRiskMatters.com. I have worked with the Lex Blog team for half a dozen years and credit them for wonderful technical support and customer service.

Well over a million viewers and nearly a thousand posts later, I am told that my analyses and educational insights about a host of timely topics have been helpful to others. As I look back on what I have written over the years, I am struck by how much of what was deemed critical in its day remains immensely important now. Indeed, one might assert that topics such as pension risk management, service provider due diligence, fiduciary education and fee benchmarking have taken on a new life. There is more scrutiny of what goes on inside the investment committee meeting room and litigation seems to be on the rise. According to the producer of the upcoming American Conference Institute about the topic of ERISA litigation, he is facing a sell-out crowd this year. (I am happy to announce that I will be a co-panelist for a session at this conference and will address the topic of how to work effectively with an economic expert.)

I am deeply grateful for the feedback from this blog's many readers and always welcome comments and suggestions.

Happy 8th birthday PensionRiskMatters.com!

Peanuts and Pensions

In case you missed it, Kraft Foods Group Inc. ("Kraft") reported a fourth quarter 2013 increase in profit and a $1.11 per share accounting gain, due in part to its pension plan. Higher discount rates and bigger returns on its portfolio were cited factors, with a nod to the company's use of "some of the cost savings to boost marketing behind brands like Jello-O dessert and Planters peanuts." See "Kraft Net Soars on Pension-Related Gain" by John Kell (Wall Street Journal, February 13, 2014). Other news, straight from its earnings call, describes the use of roughly $600 million of the company's free cash flow to add contributions to the pension plans in 2013. The result is a rise in the funded ratio to 96 percent at calendar year-end, up from 77 percent one year earlier. Expected contributions for 2014 will run around $200 million, with $60 million of that number representing required cash to fund Kraft's Canadian pension plans. See "Q4 2013 Earnings Call Transcript," February 13, 2014 and "Kraft Foods Group Reports Fourth Quarter and Full Year 2013 Results," February 13, 2014. Noteworthy is that Kraft commenced a liability-driven investment ("LDI") strategy, to be phased in over multiple years, (and I am paraphrasing here) as a way to more appropriately line up "pension assets with the projected benefit obligation to reduce volatility" by moving towards an 80% fixed income, 20% equity securities mix. See page 62 of the latest Kraft 10-K filing.

This alert from Kraft is yet another example of the link between pension management and corporate finance. There are lots of other companies that have made similar declarations about the relationship between employee benefit plan economics and company operations. As I wrote in "Pension risk, governance and CFO liability" by Susan Mangiero (Journal of Corporate Treasury Management, 2012), private sector plan sponsors are acutely aware of the economic and legal aspects of offering ERISA plans to their respective work force. A dollar paid by shareholders for benefits could be seen as a cost that takes away from growing the enterprise or an investment in happy workers who add to the bottom line. Either way, the Treasury and Investor Relations teams are increasingly involved in discussions and related action steps to address the management of retirement plans. This is no coincidence. Liquidity, enterprise risk management, valuation, shareholder relations, talent retention and capital adequacy are a few of the numerous touch points that bring together the worlds of Human Resources ("HR"), the board and C-level officers such as the CEO and the Chief Financial Officer. This trend is unlikely to go away any time soon. To the contrary, expect more interactions across company functions and around the world.

To read a related blog post, see "Pension Risk, Governance and CFO Liability," PensionRiskMatters.com, March 4, 2012.

Private Equity Fund Limited Partners and Pension Funding Levels

Some pension plans invest in private equity funds or funds of funds. Certain private equity funds invest in companies with pension plans. This means that pension funds that invest in this asset class need to be aware of any deficiencies in their plans as well as those portfolio company plans to which they are likewise exposed. While the notion of "my brother's keeper" may not resonate well with stewards of billions of dollars, it is a reality. This is especially true, in the aftermath of the Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund decision, No. 12-2312 (1st Circuit, July 24, 2013).

Despite the "record year" described by Wall Street Journal reporter Ryan Dezember, private equity investments, like any other, necessitate careful due diligence on the part of institutional investors that seek a seat at the limited partner table. (See "Private Equity Enjoys a Record Year: Firms That Buy and Sell Companies Are Set to Return More Than $120 Billion to Investors in 2013," December 30, 2013). A critical question is whether continued gains will be diminished if a portfolio company has to divert cash to top off an underfunded pension plan. One way to address the issue is for a pension plan, endowment or foundation to ask the private equity fund general partner how much attention they pay to ERISA economics.

There are numerous other queries to make. In the March/April 2014 issue of CFA Institute Magazine, ERISA attorney David Levine (with Groom Law Group, Chartered) and Dr. Susan Mangiero, CFA (with Fiduciary Leadership, LLC), provide insights for improved due diligence, in a post-Sun Capital world. Suggested action steps include, but are not limited to, the following items:

  • Ask whether a private equity fund is "relying on the position that it is not a 'trade or business' and is therefore not subject to liability for a portfolio company's" ERISA plan deficit;
  • Request to see a list of the holdings for purposes of knowing whether a particular private equity fund has a majority ownership in any or all of its portfolio companies;
  • Investigate whether the Pension Benefit Guaranty Corporation ("PBGC") has red flagged any of the pension plan(s) of a business that is part of a private equity fund's portfolio;
  • Understand how, if at all, a private equity fund is planning to solve a pension plan underfunding problem;
  • Acknowledge that a portfolio company's ERISA liabilities could make an exit difficult, whether via an Initial Public Offering or an acquisition, and that this in turn could lengthen the time before a limited partner can cash out;
  • Identify the extent to which a private equity fund regularly examines the degree to which any or all of its portfolio companies are parties to labor contracts that may be difficult to modify; and
  • Be aware that this important legal decision could invite more litigation and regulatory actions that, regardless of outcome, have a cost and therefore a potential impact on future private equity fund returns.

If you have any difficulty in accessing our article, please send an email request to contact@fiduciaryleadership.com.

Institutional Asset Allocation

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

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

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

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

Working With Financial and Fiduciary Experts

I am delighted to join the panel about how to work with financial and fiduciary experts on ERISA (and more broadly, investment management) cases. This panel, entitled "Expert Coordination: Working With Financial and Fiduciary Experts," is part of the upcoming 7th National Forum on ERISA Litigation. Produced by the American Conference Institute, this Chicago event will run from April 28 to April 29, 2014. I will speak from 10:45 am to 11:35 am on April 29, 2014. See below for more details.

Many ERISA litigators will admit that the quality and communication skills of an economic expert can greatly impact the outcome of a case. Getting the right expert(s) in place sooner than later can be a distinct advantage. When that does not occur, important items may be excluded from discovery or pre-motion analysis. This panel will focus on the challenges associated with tight client budgets, working with multiple experts, knowing when to bring an expert(s) on board and evaluating how much information to share.

Muni Bonds, Pensions and Financial Disclosures: Compliance, Litigation and Regulatory Trends

Mark your calendars to attend "Muni Bonds, Pensions and Financial Disclosures: Compliance, Litigation and Regulatory Trends."

At a time when unfunded pension and health care obligations are accelerating the budgetary crisis for some municipalities, experts fear that current problems are the tip of the iceberg. A new focus on accounting rules, the quality of disclosure to muni bond investors and the due diligence practices of underwriters, portfolio managers and advisers could mean heightened liability exposure for anyone involved in the nearly $4 trillion public finance marketplace. Add the history-making Detroit bankruptcy decision to the mix and attorneys have the makings of a perfect storm as they attempt to navigate these unchartered waters. The U.S. Securities and Exchange Commission has made no secret of its priority to sue fraudulent players in the public finance market. Insurance companies are reluctant to underwrite policies for high-risk government entities at the same time that municipal fiduciaries are more exposed to personal liability than ever before, especially as the protection of sovereign immunity is being challenged in court. Litigation that involves how much monitoring of risk factors took place is on the rise.

Public finance and securities litigation counsel, both in-house and external, can play a vital role in advising municipal bond market clients as to how best to mitigate litigation and enforcement risk or, in the event that an enforcement action has already been filed, how best to defend such litigation. Please join Orrick, Herrington & Sutcliffe LLP partner, Elaine C. Greenberg, and retirement plan fiduciary expert, Dr. Susan Mangiero, for an educational and pro-active program about the complex compliance and litigation landscape for municipal bond issuers, underwriters, asset managers and advisers. Topics of discussion include the following:

  • Description of the current regulatory environment and why we are likely to see much more emphasis on the disclosure activities of public finance issuers and the due diligence practices of underwriters and advisers;
  • Overview of hot button items that impact a bond issuer’s liability exposure, to include valuation of underlying collateral, rights to rescind benefit programs in bankruptcy and the use of derivatives as part of a financing transaction;
  • Explanation of GASB accounting rules for pension plans and likely impact on regulatory oversight of securities disclosure compliance and related enforcement exposures;
  • Discussion about trends in municipal bond litigation – who is getting sued and on what basis; and
  • Description of pro-active steps that governments and other market participants can take to mitigate their legal, economic and fiduciary risk exposures.

Featured Speakers:

Ms. Elaine C. Greenberg, a partner in Orrick, Herrington & Sutcliffe LLP’s Washington, D.C., office, is a member of the Securities Litigation & Regulatory Enforcement Group. Ms. Greenberg’s practice focuses on securities and regulatory enforcement actions, securities litigation, and public finance. Ms. Greenberg is nationally recognized for producing high-impact enforcement actions, bringing cases of first impression and negotiating precedent-setting settlements, she possesses deep institutional knowledge of SEC policies, practices, and procedures. Ms. Greenberg brings more than 25 years of securities law experience, and as a Senior Officer in the SEC's Enforcement Division, she served in dual roles as Associate Director and as National Chief of a Specialized Unit. As Associate Director of Enforcement for the SEC's Philadelphia Regional Office, she oversaw the SEC's enforcement program for the Mid-Atlantic region and provided overall management direction to her staff in the areas of investigation, litigation and internal controls. In 2010, she was appointed the first Chief of the Enforcement Division's Specialized Unit for Municipal Securities and Public Pensions, responsible for building and maintaining a nation-wide unit, and tasked with overseeing and managing the SEC's enforcement efforts in the U.S.’s $4 trillion municipal securities and $3 trillion public pension marketplaces. Ms. Greenberg recently gave a speech entitled “Address on Pension Reform” at The Bond Buyer’s California Public Finance Conference in Los Angeles on September 26, 2013.

Dr. Susan Mangiero is a CFA charterholder, certified Financial Risk Manager and Accredited Investment Fiduciary Analyst™. She offers independent risk management and valuation consulting and training. She has provided testimony before the ERISA Advisory Council, the OECD and the International Organization of Pension Supervisors. Dr. Mangiero has served as an expert witness as well as offering behind-the-scenes forensic analysis, calculation of damages and rebuttal report commentary on matters that include distressed debt, valuation, investment risk governance, financial risk management, financial statement disclosures and performance reporting. She has been actively researching and blogging about municipal issuer related retirement issues for the last decade. She has over twenty years of experience in capital markets, global treasury, asset-liability management, portfolio management, economic and investment analysis, derivatives, financial risk control and valuation, including work on trading desks for several global banks, in the areas of fixed income, foreign exchange, interest rate and currency swaps, futures and options. Dr. Mangiero has provided advice about risk management for a wide variety of consulting clients and employers including General Electric, PriceWaterhouseCoopers, Mesirow Financial, Bankers Trust, Bank of America, Chilean pension supervisory, World Bank, Pension Benefit Guaranty Corporation, RiskMetrics, U.S. Department of Labor, Northern Trust Company and the U.S. Securities and Exchange Commission. Dr. Mangiero is the author of Risk Management for Pensions, Endowments and Foundations  (John Wiley & Sons, 2005), a primer on risk and valuation issues, with an emphasis on fiduciary responsibility and best practices. Her articles have appeared in Expert Alert (American Bar Association, Section of Litigation), Hedge Fund Review, Investment Lawyer, Valuation Strategies, RISK Magazine, Financial Services Review, Journal of Indexes, Family Foundation Advisor, Hedgeco.net, Expert Evidence Report, Bankers Magazine and the Journal of Compensation and Benefits. Dr. Mangiero has written chapters for several books, including the Litigation Services Handbook and The Handbook of Interest Rate Risk Management.

Pension De-Risking For ERISA Plan Sponsors

I am delighted to join the speaker faculty for a December 10, 2013 webinar entitled "Pension De-Risking for Employee Benefit Sponsors: Minimizing Risks and Ensuring ERISA Compliance When Transferring Pension Obligations to Other Parties." If this topic is of interest to you, send me an email. I can make ten (10) guest passes available on a complimentary, first come, first served basis. Otherwise, you and your colleagues can register by visiting the Strafford Continuing Legal Education site. This topic is important and timely. I look forward to having you join us on December 10, 2013.

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 ERISA fiduciary standards are met. Counsel should guide companies on how to establish the reasonableness of decisions and prepare to defend against possible court challenges.

Susan Mangiero, Managing Member at Fiduciary Leadership; Sam Myler at McDermott Will & Emery; Anthony A. Dreyspool, Senior Managing Director at Brock Fiduciary Services and David Hartman, General Counsel and Vice President at General Motors Asset Management, 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.

The panel will review these and other key questions:

  • 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?
  • What are the grounds for the various challenges to de-risking techniques and what are the techniques to avoid those challenges?

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

 

Fiduciary Management For Pension Plans

Besides being knowledgeable about medicine, nutrition and state-of-the-art health research, my doctor has a great sense of irony. He says things that make me laugh out loud. When I saw him recently, I mentioned how much I was enjoying reruns of some older television shows like Quincy, M.E. He replied, in typical clever fashion, "yea, but Sam did all the work and Quincy took the credit." It struck a chord because his statement is mostly true. In case you never watched the popular series about a coroner who helps the police solve crimes, veteran actor Jack Klugman (now deceased) applies Criminal Scene Investigation ("CSI") like smarts and tenacity in pursuit of justice. Sam Fujiyama (played wonderfully by actor Robert Ito) is likewise a medical doctor. He works alongside Dr. Quincy and is portrayed as an integral part of uncovering the truth.

In pension land, it is often the case that sponsors think they have hired someone to play the role of helpful Sam. The notion is that the advisor, consultant or fund of funds professional will be paid a fee to carry out a certain level of due diligence about action items such as setting up or revising an appropriate investment strategy, selecting or terminating an asset manager, redesigning a plan or evaluating pension transfer structures. Once the engagement letter is signed and a retainer fee is in place, the plan sponsor, like Dr. Quincy, can breathe a sigh of relief. Help is supposedly on the way - maybe. The safety net concept attached to bringing a third party on board, combined with what a colleague of mine describes as fiduciary fatigue, is reflected in the global growth of firms that describe themselves as fiduciary managers. While the retirement plan regulatory regime varies by country, the investment outsourcing model is gaining sway in the United States, the United Kingdom, the Netherlands and elsewhere. The undeniable trend to delegate merits discussion.

Before employers get too comfortable and think that their pension problems now belong to someone else, it is noteworthy to acknowledge that there are more than a few lawsuits that have been filed against third parties. Some of them allege breach on the basis of a failure to properly oversee and respond accordingly.

My observations come from firsthand experience. I have served as an economic analyst or testifying expert on disputes between an institutional investor such as a retirement plan, endowment, foundation or family trust. For other matters, I have provided due diligence training to fiduciaries and board members or reviewed the risk practices in place prior to a vendor being selected or as part of a later review of said vendor, once hired. As the founder of an educational start-up company a few years ago, I had a front row seat to the ongoing discussions between buyers and sellers of investment, risk and valuation services. Information in the form of repeated and in-depth surveys and numerous conversations about what pensions, endowments, foundations, family offices and other types of trust investors want and need from those who provide advice is telling. One issue that came up often from institutional investors was how to benchmark the quality of the work being provided by a delegate. This is a critical subject, especially for those outsourced professionals who are doing a terrific job and want their clients to be satisfied.

The topic of service provider due diligence is timely, important and the focus of my presentation on October 25, 2013 as part of the American Conference Institute's 6th Annual ERISA Litigation Conference. Interested readers are welcome to download my fiduciary due diligence slides.

Dr. Susan Mangiero Speaks About Pensions and Infrastructure Investing

I am delighted to join the faculty of the PEI Alternative Insight Infrastructure Investor conference for limited partners on December 5, 2013. I will be joined by Mr. Emil Frankel (Senior Advisor, Crosswater Advisors and Visiting Scholar, Bipartisan Policy Center), Ms. Jodie Misiak (Manager of Innovative Finance, Maryland Department of Transportation), Ms. Kathleen Sanchez (Program Manager, Public-Private Partnership Program, Los Angeles County Metropolitan Transportation Authority) and Ms. Sonia M. Axter (Managing Director of Infrastructure Investments, The Union Labor Life Insurance Company).

In our session entitled "How international investors are structuring their portfolios," we will be address issues such as regulatory risk constraints, sub-sectors that are currently in favor with institutional investors, role of infrastructure investments for limited partners and the different ways that limited partners can invest in this asset class.

To access the agenda for this two-day program to be held at the Westin Hotel in New York City, click here. I hope to see you at what looks to be an exciting, timely and informative event.

Financial Executives Address De-Risking and ERISA Benefit Programs

According to "Balancing Costs, Risks, and Rewards: The Retirement and Employee Benefits Landscape in 2013" (CFO Research and Prudential Financial, Inc. - July 2013), numerous changes are underway. The opinions of senior financial executive survey takers validate the continued twin interest in expanding defined contribution plan offerings and managing the liability risk of existing defined benefit ("DB") plans. The strategic import of benefits as a way to attract and retain talent is recognized by "nearly all respondents in this year's survey." Regarding the restructuring of traditional pension plans, this report states that nearly four out of every ten leaders have frozen one or more DB plans yet recognize the need to manage risk for those plans as well as for active plans. Liability-driven investing ("LDI") programs are being adopted by "many companies". Transfer solutions are being "seriously" considered by roughly forty percent of companies represented in the survey. Almost one half of respondents agree that a return to managing its core business could be enhanced by doing something to address pension risk.

None of these results are particularly surprising but it always helpful to take the pulse of corporate America with respect to ERISA and employee benefit programs. I have long maintained that the role of treasury staff will accelerate. There are numerous corporate finance implications associated with the offering of non-wage compensation. As I have added in various speeches and articles echoing what numerous ERISA attorneys cite (and I am not an attorney), plan sponsors must carefully weigh their fiduciary responsibilities to participants against those of shareholders in arriving at a particular decision.

For a copy of the study, click here.

Interested readers may also want to check out the reference items listed below:

If you have further comments or questions, click to email Dr. Susan Mangiero.

ERISA Assets: QPAM and INHAM Audit Legal Requirements and Best Practices

I am happy to announce that I will be joined by esteemed colleagues Howard Pianko, Esquire (Seyfarth Shaw) and Virginia Bartlett (Bartlett O'Neill Consulting) on September 10, 2013 from 1:00 to 2:30 pm EST to talk about QPAM and INHAM compliance audits. See below for more information. Click to register for this forthcoming educational event about ERISA requirements. (Note: I am given a few complimentary guest passes. Contact me if you are interested and they are still available.)

This CLE webinar will prepare counsel to advise asset manager clients regarding Qualified Professional Asset Manager (QPAM) and in-house asset manager (INHAM) audits as required by the Department of Labor. The panel will review the new exemption rules, who can conduct an audit, what the process entails, and how to showcase good practices with existing and prospective plan sponsors.

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Dr. Susan Mangiero Speaks at Fiduciary Conference About Due Diligence for Alternative Investments

I am delighted to have been invited to join the faculty of the Master’s Track at the annual fi360 investment fiduciary conference, held this year in Scottsdale, Arizona. Speakers include: (1) ERISA attorney Charles Humphrey (2) Edward Lynch, AIFA, RF, GFS with Fiduciary Plan Governance, LLC (3) Dr. Susan Mangiero, AIFA, CFA, FRM with Fiduciary Leadership, LLC and (4) pension auditor Michelle Sullivan, CPA with Freed Maxick CPAs

The fi360 Master’s Track offerings are created especially for those with a knowledge of fiduciary standards and how that standard applies to the topics being presented.

Our session is entitled "Due Diligence for Alternative Investments." Our panel will focus both on the legal issues and the internal control compliance issues that cannot be ignored by anyone with a fiduciary responsibility to prudently select and monitor. This session will describe the impact of Dodd-Frank on investing in alternatives, various court cases and regulatory enforcement actions as well as the DOL/IRS regulatory guidance on alternative investment allocations. Click to read more about this session and the other sessions to be presented at this conference of investment fiduciary professionals from April 17 to April 19.

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 www.pensionriskmatters.com, 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 www.pensionriskmatters.com, 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!

DOL Issues Advisory Opinion About Use of Swaps by ERISA Plans

ERISA plans have long relied on over-the-counter swaps to hedge or to enhance portfolio returns. Given the high level of attention being paid to de-risking solutions these days, the role of swaps is even more important since these derivative contracts are often used by insurance companies and banks to manage their own risks when an ERISA plan transfers assets and/or liabilities. Big dollars (and other currencies) are at stake. According to its 2012 semi-annual tally of global market size, the Bank for International Settlements ("BIS") estimates the interest rate swap market alone at $379 trillion. Click to access details about the size of the over-the-counter derivatives market as of June 2012. It is therefore noteworthy that regulatory feedback has now been provided with respect to the use of swaps by ERISA plans.

In its long awaited advisory opinion issued by the U.S. Department of Labor, Employee Benefits Security Administration ("EBSA"), ERISA plans can use swaps without fear of undue regulatory costs and diminished supply (due to brokers who do not want to trade if deemed a fiduciary).

In its rather lengthy February 7, 2013 communication with Steptoe & Johnson LLP attorney Melanie Franco Nussdorf (on behalf of the Securities Industry and Financial Markets Association), EBSA officials (Louis J. Campagna, Chief - Division of Fiduciary Interpretations, and Lyssa E. Hall, Director - Office of Exemption Determinations) made several important points about whether a swaps "clearing member" (a) has ERISA 3(21)(A)(i) fiduciary liability if a pension counterparty defaults and the clearing member liquidates its position (b) is a party in interest as described in section 3(14)(B) of ERISA with respect to the pension plan counterparty on the other side of a swaps trade and (c) will have created a prohibited transaction under section 406 of ERISA if it exercises its default rights. These include the following.

  • Margin held by a Futures Commission Merchant ("FCM") or a clearing organization as part of a swap trade with an ERISA plan will not be deemed a plan asset under Title 1 of ERISA. The plan's assets are the contractual rights to which both parties agree (in terms of financial exchanges) as well as any gains that the FCM or clearing member counterparty may realize as a result of its liquidation of a swap with an ERISA plan that has not performed.
  • An FCM or clearing organization should not be labeled a "party in interest" under ERISA as long as the swap agreement(s) with a plan is outside the realm of prohibited transaction rules.

There is much more to say on this topic and future posts will address issues relating to the use of derivatives by ERISA plans. In the meantime, links to this 2013 regulatory document and several worthwhile legal analyses are given below, as well as a link to my book on the topic of risk management. While it was published in late 2004 as a primer for fiduciaries, many of the issues relating to risk governance, risk metrics and risk responsibilities remain the same.

Pension De-Risking: Compliance and ERISA Litigation Considerations

On January 16, 2013, this blogger - Dr. Susan Mangiero - had the pleasure of speaking with (a) Attorney Anthony A. Dreyspool (Senior Managing Director, Brock Fiduciary Services) (b) Attorney David Hartman (General Counsel and Vice President, General Motors Asset Management) and (c) Attorney Sam Myler (McDermott Will & Emery) about compliance "must do" items and litigation vulnerabilities. Sponsored by Strafford Publications, "Pension De-Risking for Employee Benefit Sponsors" attracted a large audience of general counsel, outside ERISA counsel and financial professionals. In addition to numerous talking points shared by all of us presenting, we had lots of attendee questions about issues such as balance sheet impact, case law and annuity regulations.

Click to download the slides for "Pension De-Risking for Employee Benefit Sponsors."

In my opening comments, I described some of the factors that are being discussed as part of conversations relating to whether a plan sponsor should de-risk or not. These include, but are not limited to, the following:

  • Low interest rates;
  • Higher life expectancies;
  • Increased PBGC premiums;
  • Company's debt capacity;
  • Intent to go public or sell to an acquirer;
  • Available cash; and
  • Knowledge and experience of in-house ERISA fiduciaries.

Attorney Hartman urged anyone interested in de-risking to allow ample time of between six to eighteen months in order to file documents, research and create or modify policies and procedures as needed. He also advised companies to make sure that participants are fully apprised of their rights and to explain the merits of any particular transaction. For companies that may want to redesign a plan(s) for hourly workers, more time may be needed, especially if collective bargaining agreements are impacted.  His suggestion is to inform plan participants about state guarantees that apply in the event of an insurance company default. When retirees are emotionally attached to getting a check from their employer, care must be taken to allay any concerns that future monies will come from an outside third party. Keep in mind that the market may be moving at the same time that a deal is being put together. Regarding the transfer of assets, Attorney Hartman stated the importance of finding out early on what an insurance company is willing to accept. An independent appraiser may be required to determine the appropriate value of certain assets.

I talked about the various risks that can be mitigated via de-risking versus those that are introduced as the result of some type of defined benefit plan transfer or derivatives overlay strategy. The point was made that there is no perfect solution and that facts and circumstances must be taken into account. I added that litigation may arise if a plaintiff (or class of plaintiffs) question any or all of the following items:

  • Whether executives are unduly compensated as the result of an earnings or balance sheet boost due to de-risking;
  • Timing of a transaction and whether interest rates are "too low" at the time of a deal;
  • Completeness (or lack thereof) of information that is provided to participants;
  • Amount of fees paid to vendors;
  • Use of an independent fiduciary;
  • Level of asset valuations;
  • Use of an independent appraiser;
  • Extent to which due diligence was conducted on the structure of deal; and/or
  • Level of vetting of "safest available" annuity provider.
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New PCAOB Report Finds Pension Valuation Numbers Wanting

According to a new report just published by the Public Company Accounting Oversight Board ("PCAOB"), valuation of pension plan assets was one of the audit areas with "deficiencies attributable to failures to identify and test controls." Given the importance of having proper pension valuations carried out by knowledgeable and experienced persons, it is no surprise that this oversight organization devoted an entire section of its findings to the topic of valuation of pension plans assets. The problems they found include the following:

  • Insufficient testing of controls over how pension plan assets are valued;
  • Testing of controls that were imprecise and therefore did not allow for an assessment of the risk of material misstatement by plan auditors;
  • Failure to properly test the valuation of pension plan assets; and/or
  • Relying on management or the person(s) who performed the reviews without seeking an independent assessment as to why "variances from other evidential matter" were occurring.

In response to these findings, a prominent ERISA attorney commented that the cited deficiencies were not surprising and that valuation problems will continue to grow for those retirement plans that are allocating more money to "hard to value" funds.

In his 2011 speech before the AICPA National Conference, Jason K. Plourde with the Office of the Chief Accountant, U.S. Securities and Exchange Commission ("SEC"), talked at length about the role of pricing services and how securities that are not actively traded should be valued. He suggested that management "may need to perform different procedures and controls when considering the information from pricing services regarding the fair value of financial instruments..."

Concerns about how best to value pension plan assets and regularly test methodologies and controls related to said valuations took center stage in 2008 when the ERISA Advisory Council working group on "Hard to Value Assets" met to discuss how best to improve things. This blogger - Dr. Susan Mangiero - testified on the topic of "hard to value assets," emphasizing that poor valuations lead to a cascade of problems. For one thing, inflated valuations translate into higher fees paid by ERISA pension plans. Second, incorrect valuations make it difficult to properly review and revise any of the items listed below, each of which are critical to proper fund management such as:

  • Asset allocation;
  • Exposure to a particular sector or fund manager;
  • Fee benchmarking for appropriateness of compensation paid to a manager;
  • Type and size of hedges;
  • Hiring and termination of an asset manager(s);
  • Regulatory funding ratio and related cash financing; and
  • Cost of pension plan de-risking for some or all of current defined benefit plan participants.

If you missed reading Dr. Susan Mangiero's September 11, 2008 testimony before the ERISA Advisory Council Working Group, click to read about "hard to value" assets in the context of ERISA fiduciary duties and pension risk management.

With more pension plans reporting large scale deficits, don't be shocked if further questions are asked about the integrity of asset and liability valuation numbers.

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.

Description

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.

Outline

  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

Benefits

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.

Faculty

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.

Pensions and Corporate Finance: How to Avoid Buyer's Remorse

Ever since the PBGC’s 2007 opinion that a private equity fund with a controlling interest can be liable for a portfolio company’s pension problems, there is increased evidence that corporate transactions can go seriously awry if ERISA benefit plans are not properly addressed. Legal issues are not the only risk factor that could cause a merger, acquisition, spin-off or carve-out to fail to materialize. Low interest rates, investment lock-ups, participant longevity and complex vendor contracts are a few of the challenges that must be confronted by the legal and finance team in charge of due diligence. And with virtually every defined benefit plan facing funding issues in light of these circumstances, the PBGC is extremely proactive in seeking concessions to not interfere with corporate transactions yet hold parties who may have responsibility for unfunded liabilities accountable. Headlines are replete with articles about deals that were stalled or failed because ERISA due diligence was given short shrift. In 2010, the acquisition of a major chemical company took less than six months but coordinating the relationships with defined contribution managers took nearly two years to wrap up. Talks between a large manufacturing company and a potential target company are currently focused on how best to tackle the acquiree’s multi-billion dollar pension fund gap. In the aftermath of the settlement of a recent case, private equity firms and limited partners continue to be jittery about joint and several liability for pension plan funding gaps, making it harder to take a portfolio company public or sell. Taken together, the most important thing that a potential corporate buyer and its counsel can do is to acknowledge the importance of proper due diligence. These problems are not going away and arguably could get much worse.

Join Dr. Susan Mangiero, CFA, certified Financial Risk Manager and Accredited Investment Fiduciary Analyst and senior ERISA attorney Lawrence K. Cagney to talk about ways to keep a deal from derailing and to avoid buyer’s remorse due to an incomplete assessment of pension plan economics on enterprise value.

Join us to hear speakers talk about critical steps and lessons learned from their experience, to include the following:

  • How to revise investment and/or hedging strategy and policy statement(s) when organizations merge;
  • Elements of an ERISA service provider due diligence analysis when plans are combined;
  • Red flags for an institutional investor to consider when seeking to allocate to private equity portfolios with “pension-heavy” companies that may be hard to exit without costly restructuring;
  • Assuring that participant communication is comprehensive;
  • Role of the corporate finance attorney versus ERISA counsel; and
  • Installing knowledgeable fiduciaries for the new and/or merged employee benefit arrangements

Click to register for "Pensions and Corporate Finance: How to Avoid Buyer's Remorse," sponsored by the Practising Law Institute on November 15, 2012 from 1:00 pm to 2:00 pm EDT.

QPAM and INHAM Compliance Audit 101 For ERISA Asset Managers

In this timely and informative webinar hosted by FTI Consulting, legal and compliance experts will provide critical information about the Qualified Professional Asset Manager ("QPAM") exemption and related compliance audit requirement that applies to numerous financial institutions that manage or want to manage ERISA pension money. Speakers will likewise address the merits of managing money for captive ERISA benefit plans and what it means to be an In House Asset Manager ("INHAM").

Getting the right team to conduct the required audit is one important way to mitigate litigation and enforcement risk and to attract and retain institutional dollars. Having a proper audit conducted and using the information to correct deficiencies is another critical step for anyone who understands that non-compliance can be costly.

This timely and informative webinar will address issues that include the following:

  • Background information about the new ERISA rule for a Qualified Professional Asset Manager (“QPAM”) audit;
  • What it means to be a Qualified Professional Asset Manager or In-House Asset Manager ("INHAM");
  • Who must comply and in what timeframe;
  • Who can carry out a QPAM /INHAM audit;
  • What a QPAM audit entails in terms of information-gathering and scheduling;
  • Case study discussion; and 
  • How the results of a QPAM audit can be used to improve operations and client relationships.

Who Should Attend:

  • Chief Compliance Officers of asset managers
  • Business development executives for asset managers
  • Internal legal counsel for asset managers and other financial firms
  • ERISA consultants and investment advisors

Please join Timothy Brennan, Assistant General Counsel at The Hartford; Howard Pianko, Partner, Seyfarth Shaw LLP; and Susan Mangiero, Managing Director, FTI Forensic & Litigation Consulting as they address these issues and your questions. To attend this free webcast scheduled for Tuesday, October 23, at 1:00 pm Eastern, please click to register for "Managing ERISA Pension Money - QPAM and INHAM 101."

For further information, click to read "Amendment to Prohibited Transaction Exemption (PTE) 84-14 for Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers," Federal Register, July 6, 2010.

ERISA Litigation Against Service Providers

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

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

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

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

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

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

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

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.

What Every Fiduciary Needs to Know About How to Mitigate Investment Fraud Risk

Economic growth may be anemic but fraud continues to find a life of its own. According to the Financial Fraud Research Center, at least 30 million people are impacted by fraud each year with an annual cost of $100 billion for retail fraud alone.  In a 2011 speech, the head of the U.S. Securities and Exchange Commission discussed how key offices and divisions are working together in all areas of its anti-fraud efforts and how the SEC is collaborating more frequently with state regulators, criminal prosecutors or local nonprofits in an effort to weave these initiatives into an increasingly fine-meshed net that is focused on fighting fraud. While the U.S. Department of Labor is not exclusively focused on fraud, enforcement teams have been busy with a closure of nearly 3,500 civil cases and 302 criminal cases, monetary results of $1.39 billion and 129 indictments.

Surprisingly, there is little information available to institutional and individual investors alike as to how to mitigate the risk of losing money to fraudsters. The goal of this webcast is to empower investors to better protect themselves with knowledge of situations to avoid whenever possible. Attendees will hear experts talk about:

  • Common causes of investment fraud;
  • Enforcement and litigation trends relating to investment misdeeds;
  • Lessons learned from financial scandals of the last decade;
  • Role of the investment fiduciary in vetting service providers;
  • Red flags to detect poor internal controls that could lead to fraud; and
  • Regulatory action to stem financial fraud and preserve the integrity of the capital markets.

Speakers for this 75-minute event include:

  • Dr. Susan Mangiero, CFA, FRM – Managing Director, FTI Consulting
  • Jonathan Morris, Esq. – Day Pitney LLP / former General Counsel of Barclays Wealth
  • Brian Ong – Senior Managing Director, FTI Consulting
  • Karen Tyler, North Dakota Securities Commissioner and former president of the North American Securities

To attend this webcast scheduled for Wednesday, June 13, at 1 pm Eastern and sponsored by FTI Consulting, please visit the investment fraud webinar page at http://www.securitiesdocket.com/2012/05/18/june-13-webcast-what-every-fiduciary-needs-to-know-about-how-to-mitigate-investment-fraud-risk/.

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 Risk Management Within a Fiduciary Framework

There are so many interesting insights and analyses we plan to share. It is hard to know where to begin.

We will resume active blogging on January 1, 2012.

In the meantime, have a wonderful holiday season.

Prioritizing Risk Management

Since I launched my second blog in early 2011 to discuss risk management and investment best practices for a wider institutional audience beyond pension plans alone, I've seldom posted items in both places. Instead, I've tried to provide unique insights for employee benefit plan decision-makers on www.PensionRiskMatters.com and address broader regulatory, litigation and compliance issues on www.GoodRiskGovernancePays.com.

Today is an exception. I am reprinting my comments about risk management on both blogs because I believe so strongly in the importance of effective risk management as an integral component of investment governance. I hope you enjoy reading my comments, originally published on The Glass Hammer website. For those who are not familiar with the group, check out www.TheGlassHammer.com to learn about this award-winning blog and online community created for women executives in finance, law, technology and big business. See below or click on "Thought Leaders: Prioritizing Risk Management" to read the full text of this commentary about the benefits of risk mitigation well done and the costly consequences of inattention or sloppy practices.

Full Text:

Thought Leaders: Prioritizing Risk Management, July 14, 2011, 1:00 pm

Contributed by Susan Mangiero, PhD, Investment Risk Governance Consultant and Author

For those financial institutions which have yet to grasp the importance of identifying, measuring, managing, and monitoring risks on a comprehensive basis, time may not be on their side. Regulators and litigators alike are forcing change.

There are countless individuals who want better information from their service providers about risk and are prepared to vote with their feet if they don’t get good answers. After all, these institutional investors themselves are confronted with a bevy of new mandates that require transparency. The good news is that change opens the door to business opportunities. Enlightened organizations that have good processes in place and have nothing to hide can differentiate themselves from competitors. Providing clients with education and data tools offers yet another way for asset managers, consultants, banks, and advisors to forge stronger relationships with their pension, endowment, foundation and family office clients. On the flip side, those who are reluctant to explain how they manage their financial, operational and legal risks may lose clients or worse yet, could end up as defendants in a lawsuit.

Pay to play conflicts, questions about hidden fees, state and federal legislation and new accounting rules are a few of the forces at work to ensure that trillions of institutional dollars are in good hands. Effective investment stewardship is no longer a luxury. Recent surveys confirm that buy side decision-makers continue to emphasize governance and risk management for their organizations as well as providers of products and services. Institutional investors can ill afford to lose money after a tumultuous few years. Investment committee members who give short shrift to fiduciary duties could end up being investigated by regulators or sued. According to federal court data, the number of ERISA lawsuits is going up. Factor in investment arbitrations, enforcement actions and “piggyback” securities litigation allegations and it is clear that unhappy investors are not going to accept the status quo.

1. Fiduciary Focus

Besides efforts underway by the U.S. Securities and Exchange Commission (SEC), the U.S. Department of Labor (DOL) has proposed an expanded definition of who should serve as a fiduciary to ERISA employee benefit plans. If adopted, countless more professionals will be tasked with demonstrating procedural prudence when it comes to the investment of over $30 trillion in money from corporate retirement plan sponsors. States are likewise seeking change in the form of trust law reforms that tighten accountability for the investment of monies held by endowments, foundations and charities. The questions now being addressed by judges and arbitration panels relate to “excessive” risk-taking, insufficient diversification, absence of independent assessments of hard-to-value instruments and oversight failures that have led to large losses that might have been highly preventable.

One asset management firm recently settled with the SEC for $242 million over a mistake with one of its risk management models. Another firm just settled with the SEC for $200 million due to problems in the way subprime securities were marked. A few years ago, a Northeast pension plan was sanctioned by the DOL for not having thoroughly vetted valuation numbers provided by one of its hedge fund managers.

When I testified before the ERISA Advisory Council in 2008, I emphasized that having good valuation policies and procedures is essential because it impacts so many decisions having to do with asset allocation, hedging and fees paid.

Continue Reading...

ERISA Fiduciaries Under Attack: Key Litigation and Regulatory Developments

I am pleased to announce that I will be speaking in an upcoming live phone/web seminar entitled "ERISA Fiduciaries Under Attack: Key Litigation and Regulatory Developments" scheduled for Thursday, June 16, 1:00pm-2:30pm EDT.

Litigation surveys cite breach of fiduciary duties as a fast-growing driver of ERISA lawsuits involving securities fraud and questions about investment-risk governance and prudence. Economic losses and investment complexity are only a few reasons for continued new rules, regulations and claims.

In addition, significantly increased liability exposure is expected due to the SEC's and DOL's focus on expanding the definition of plan fiduciaries.

Evolving case law is putting plan sponsors and service providers in the spotlight as never before with regard to their investment-related processes. Litigation claims are focusing on who is making the investment decisions, and the due-diligence and other procedures these decision-makers use.

My fellow panelists and I developed this program to guide attorneys through the ERISA fiduciary minefields, address best practices for fiduciaries, discuss practical realities regarding case management and settlement, and recommend action steps for counsel to investment committees, board members and the advisers, consultants, appraisers, custodians and managers who provide products and services to employee benefit plan sponsors.

We will offer our perspectives and guidance on these and other critical questions

  • When are plans adopting risk management strategies?
  • What should the composition of the investment committee be?
  • How may an expanded "fiduciary" definition impact potential damages?
  • Does Dodd-Frank affect plan-management concerns?
  • How should insurance coverage be reviewed and managed?

After our presentations, we will engage in a live question and answer session with participants — so we can answer your questions about these important issues directly.

I hope you'll join us.

Click for more information or to register for this webinar about ERISA litigation.

Sincerely,

Susan Mangiero, PhD, CFA, FRM

Retirement Townhall Adds to Debate on Pension Accounting

In "New reporting trend may ultimately put pain in rearview mirror" (Retirement Townhall, March 23, 2011), Milliman Inc. executive Bart Pushaw cites "Big Baths and Pension Accounting" by Susan Mangiero (March 9, 2011) and "Rewriting Pension History" by Michael Rapoport (Wall Street Journal, March 9, 2011) in his discussion about pension plan reporting reform. Specifically, Pushaw talks about the convergence of U.S. Generally Accepted Accounting Principles ("GAAP") with international standards and the likelihood that plan sponsors' earnings "would be automatically increased, and expenses decreased, for future years" because of accelerated "hits" when performance is poor. He adds that a move towards more realistic representation of the funding status of a particular defined benefit plan will encourage the use of liability driven investing ("LDI") as a way to "avoid the significant mark-to-market hits that are expected in the future."

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, www.PensionRiskMatters.com, 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 www.PensionRiskMatters.com, 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 www.PensionRiskMatters.com.

Dr. Susan Mangiero to Speak at ERISA Litigation Conference

Dr. Susan Mangiero, CFA, FRM joins an esteemed panel of speakers as part of "Conflicts in Plan Sponsor and Service Provider Relationships." She is joined by:

  • Attorney Michael J. Prame, Groom Law Group
  • Attorney Elizabeth J. Bondurant, Smith Moore Leatherwood LLP and
  • Attorney Bradley J. Schlichting.

According to the agenda, the panel will address the "unique issues that arise in connection with the provision of services to employee benefit plans, understanding the division of responsibilities and whether discretion has been delegated to the service provider, assessing the fiduciary status of third-part service providers" and much more.

Given current worldwide efforts to broaden the definition of who serves as a fiduciary and a classification of their duties, this panel's purview is timely and important.

Click to visit the American Conference institute website.