Fiduciary Education Considerations

Rumor has it that regulatory exams of retirement plans continue to include explicit questions about whether a formal education program exists and, if it does, what it contains. Certainly the topic is not new. In 2002, the Working Group on Fiduciary Education and Training made recommendations to the U.S. Department of Labor to include the following:

  • Ensure that everyone understands that a fiduciary must "perform competently" which means, by extension, that he or she must be educated about duties and responsibilities;
  • Appoint someone to lead fiduciary education and outreach on a national basis;
  • Expand guidance as to what constitutes "best practices," adding to guidelines such as "A Look at 401(k) Fees for Employers";
  • Recognize that fiduciaries of smaller plans will likely have different training needs than those of larger plan fiduciaries; and
  • Provide helpful tools such as a dedicated hotline, a primer about fiduciary duties and conferences. 

A visit to the U.S. Department of Labor website entitled "Getting it Right - Know Your Fiduciary Responsibilities" yields a treasure trove of educational publications and hyper links to various online tools such as The ERISA Fiduciary Advisor. In addition, there are countless organizations that provide extensive fiduciary programs, some of which lead to certifications should one pass exams and meet experiential mandates. I myself have both taken and led various workshops about investment fiduciary subjects and continue to satisfy the requirements to be an Accredited Investment Fiduciary Analyst.

Yet with the plethora of available information about what it takes to carry out one's fiduciary duties, allegations of breach continue and on a grand scale. During a recent program entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors," my co-presenters and I talked about the importance of education and the consequences of not being up to speed on what has to be done on behalf of participants.

Some have suggested that formalizing a training requirement makes sense, adding that guidelines can demonstrate good faith and thereby serve as a defense in the event that a lawsuit is filed against investment fiduciaries down the road. Others counter that too much specificity may not allow for changes in circumstances or be inadequate to the multiple tasks of selecting advisors for more than one specialized asset class or strategy. 

Based on my experience, documentation about how internal fiduciaries are selected, let alone developed, is something of a rare bird. Likewise uncommon is a written policy that explains how investment committee members should be evaluated in terms of performance and by whom. In contrast, nearly all jobs have a specified description, an established pay scale and clear criteria about what makes for a "good" job versus performance that is deemed "unacceptable." Though one might be tempted to conclude that the absence of a formal procurement protocol for a retirement plan fiduciary means that the role is unimportant, nothing could be further from the truth. Serving as a fiduciary is a real job in every sense of the word and should be acknowledged accordingly.

Investment Committee Teamwork

Watching the Rockettes dancing in sync to foot-stomping music this weekend was a good reminder that team work requires attention and commitment. My guess is that these ladies can't miss a step and expect to stay employed for too long. It's amazing to see such synchronized movements, one leg kick after another.

Teamwork is important elsewhere too, notably in managing institutional money pools. Healthy deliberations can promote a thorough vetting of important decisions such as what asset manager to hire or whether to embark on a new strategy. In contrast, repeated squabbles and misunderstandings about core objectives can be disruptive and expensive.

Exits of key persons at the San Diego County Employee Retirement Association illustrate what happens when teams don't run smoothly. According to "San Diego County pension fund suffers new shock" by Arleen Jacobius (Pensions & Investments, March 23, 2015), this $10+ billion pension plan is keeping recruiters busy with searches for a Chief Investment Officer ("CIO"), Chief Financial Officer ("CFO"), General Counsel and now a permanent Chief Executive Officer ("CEO"), following the resignation of Mr. Brian White. As readers may recall, this public pension plan has been in the news for a derivatives-based strategy that some felt was too risky. In "San Diego Pension Dials Up the Risk to Combat a Shortfall" (August 13, 2014), Wall Street Journal reporter Dan Fitzpatrick referred to its "new approach" as "comparatively complex at a time when some big pension plans are moving in the opposite direction. See "Decision Making When You Don't Like Your Colleagues" (Pension Risk Matters, September 9, 2014) for further commentary.

On March 9, 2015, the not-for-profit organization, the Greenwich Roundtable, tackled the issue of investment committee dynamics with the release of a 60-page white paper. Contributors to "Best Governance Practices for Investment Committees" address items to consider for implementation as well as those to avoid. At the top of the list of recommendations is an urging to crystallize long-term organizational objectives and identify "unique needs." Establishing a "target for investment success that is both realistic and consistent" with fund resources is likewise mentioned. Both make sense.

An institutional investment committee needs to decide where it must go in order to create a road map process. Acknowledging that the end game could change as new circumstances arise is another factor. Setting up an actionable plan to assess how "success" will be determined is paramount. Without such, it is difficult at best to benchmark any or all decisions made by members of the investment committee.

The Rockettes may not be everyone's cup of tea when it comes to entertainment. Nevertheless their efforts in working together to deliver a seamless outcome provide a good example to follow.

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.

UK Survey Highlights Fiduciary Management Trend

According to a September 8, 2014 press release, a survey of 359 UK pension professionals by Aon Hewitt suggests that investment complexity and a busy schedule are driving the increase in demand for outside help. Notably, researchers found that strategies such as liability-driven investing require a lot of analysis and that "trustees are spending less time dealing with these decisions, with 73% of trustees devoting no more than five hours each quarter to investment issues, up from 67% in 2013." Other highlights include an observation that larger plans may opt for some help whereas smaller plans, i.e. those with assets of 500 million GBP or less "are the most likely to opt for full fiduciary management." See "Aon Hewitt Fiduciary Management Survey 2014 finds the majority of schemes opting for tailored measurement of provider performance."

The issue of time and a long list of tasks that must be carried out is not unique to the UK. In "Beyond the Beauty Contest" (June 2014), Russell Investments describes its Outsourced Chief Investment Officer ("OCIO") solution for a Canadian defined benefit plan committee that was "spending most of their time hiring and firing managers."

Acknowledging that firms with third party service offerings have a vested interest in being hired by overloaded pension executives (many of whom have full-time jobs on top of committee work), the issue as to how persons with fiduciary responsibilities spend their time is an important one to discuss.

In "The Investment Committee: Pitfalls to Avoid," the Association of Governing Boards recommends that there not be "too many" members and to adhere to an agenda. Group think is discouraged as it "can result in bad decisions that reflect the prevailing consensus of what has worked recently..." Organizations with strong support staff enjoy the advantage of having a lot of time-consuming analyses done ahead of oversight and strategy meetings. Creating and then following documents such as a clear Investment Policy Statement and Committee Charter likewise has value.

There never seems to be enough time for any investment professional. When billions of dollars are at stake, effective scheduling and use of available resources is critical.

Decision Making When You Don't Like Your Colleagues

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

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

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

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

If you have a good story to tell about investment committee dynamics, email contact@fiduciaryleadership.com.