The Fiduciary Blog

A Powerful Solution for Pension Trustee Risk Emerges

By Lynne McAuley

All public pension plans face risks that could result in situations where employees do not receive promised benefits. Frequently, this is unavoidable due to factors like securities market fluctuations, interest rate changes, liquidity demands, and inflation.

In addition, public pension boards have unique pressures due to the “hothouse” environment in which they operate. Political constituents like lawmakers, local politicians, the media, and citizen groups often try to influence pension policy which can create a lot of distracting noise. If not screened through a quality management system, board members can wind up chasing investment fads with chaos the result.

What may seem to be politically viable is many times downright foolish for pension boards from a risk management viewpoint. This can happen when:

• lawmakers vote to amend plans without following a defined process to evaluate the impact;
• benefit formulas increase obligations without considering demographic trends and available assets;
• rate of return assumptions are increased in order to reduce contributions but windup creating funding shortfalls.

Certain risks are preventable, serve no purpose, should, and can be avoided. A key risk that can be neutralized is governance risk. Governance risks occur when trustees invest plan assets in a way that needlessly under-performs expectations.

The 2000 study by the Association of Public Pension Fund Auditors, titled Public Pension Systems: Statements of Key Investment Risks and Common Practices to Address These Risks, stated “characteristics of poor governance may include incompetence, poorly or improperly defined roles, poor communications, failure to meet fiduciary responsibilities, lack of ethical standards and inconsistency.”

In 2003, this same organization issued its report titled Public Pension Systems-Operational Risk of Defined Benefit and Related Plans and Controls to Mitigate these Risks.  This study described other hazards that many trustees and executive staff of pension boards face. Hazards include:

• board members and executive staff are not adequately trained and qualified to perform their functions and fiduciary responsibilities;
• board members and executive staff do not have the expertise to promulgate policies or operate the public pension plan;
• one or more board members and/or executives may not be independent, thus possessing a conflict of interest, and may not be performing their duties solely for the benefit of retirees and beneficiaries;
• involvement in inconsequential projects, causing critical functions to suffer.

What’s more, all retirement plans, including public pension plans, rely on outside contractors. Pension board members and plan executives are often at the mercy of these contractors when:

• the scope and the object of the contracts are not sufficiently defined;
• due diligence is not performed on major investment vendors and service providers like recordkeepers;
• service providers are not certified to provide fiduciary support services;
• investment vendors, service providers, and/or recordkeepers have conflicts of interest with the plan; and
• trustees fail to monitor investment vendors, service providers, and recordkeepers as defined in fiduciary laws.

In order to combat the potential problems defined in the above mentioned studies, pension boards should ensure that they use a “structured and methodical evaluation process.”

Recently, the Global Fiduciary Standard of Excellence emerged for all pension plans. Substantiated by the Uniform Management of Public Employee Retirement System Act, case law, and industry best practices it is a defined Standard that can help public pension trustees perform safely their investment and fiduciary responsibilities. It defines a management system that ensures safety and quiets detractors.

Roland|Criss trains trustees on the new Standard.  Roland|Criss also developed a system that implements the Standard’s practices and helps avoid relapses.

The initiative to promote pension trustee excellence is governed by the Centre for Fiduciary Excellence (“CEFEX”).  It is a certifying body that provides independent recognition of pension boards that can prove their conformity to the conduct defined by the Standard.  Qualifying pension boards are evaluated based on a structured, methodical process and receive CEFEX’s mark of excellence.  CEFEX selected Roland|Criss to manage its certifications in the United States.

Roland|Criss can assist public pension plans in three ways:

1. deliver training in the practices for which trustees are legally accountable;
2. install a management system that prudently guides investment decisions; and
3. help certify public pension boards against CEFEX’s impeccable fiduciary standard of care.

Curing Fiduciary Pain

By Lynne McAuley and Ron W. Hagan

If you are a fiduciary to a retirement plan, then like most, you have felt the burden of your duties more acutely in recent years. The Pension Protection Act changed many of the ground rules and ERISA class action litigation has become a real threat.  The weight of these forces is mounting. If you are wondering how to evaluate your risk as a fiduciary, you are not alone.

For corporate executives and boards of directors, measuring performance is a primary discipline for creating and maintaining a successful business. Yet these same executives, who function as retirement plan fiduciaries, often lack appropriate measurements for determining if their retirement plans are successful, and equally important, how great is their fiduciary risk.

A recent article in Plan Sponsor magazine, titled “Statistics of Success” by the nationally recognized ERISA attorney, Fred Reish, posed the salient question: “What are the measures of success for your 401(k) plan?” He then pointed out “There is only one true measure of the success of your 401(k) plan: whether your plan is providing adequate retirement benefits for your participants.”

Reish recommended using three “pillars” on which to build a successful plan. They include: 1) participation levels; 2) deferral rates; and 3) the quality of participant investing.

In order to build each of these pillars, plan fiduciaries must adhere to defined practices in a consistent process.  In some circles this process is called a system.  In others, it’s called a recipe.  Similar to making your favorite chocolate chip cookies, you can’t miss an ingredient and expect to get the same sweet, chewy outcome.  Similarly, companies that manufacture products can’t expect to produce the same quality product if they don’t follow a quality system.  In fact, most corporate purchasers require manufacturers to certify their systems against a standard such as ISO-9000.

Let’s put this into perspective.  While ERISA and the courts don’t mandate specific investment and asset allocation strategies for public pension funds and corporate retirement plans, ERISA and the courts do mandate a prudent process.  For endowments and foundations, recent legislation requires new levels of investment fiduciary care and competence.

Regardless of which entity you serve, you may be wondering then how do I measure success?  And now, to the more poignant question, is there a recipe or a system to help lead our plan to success and ensure protection for our fiduciaries?

Yes there is.  Roland|Criss is helping transform the investment fiduciary community with a system that defines the process, measures success, and reduces risk.

Roland|Criss’ system ensures fiduciary protection by actively training, equipping, and implementing fiduciary best practices for retirement plan sponsors and trust entities.  Roland|Criss does not manage investment assets or sell financial products.  As a result, we are free from fee conflict and serve in an unbiased fiduciary oversight capacity for trustees and trustee committees.

It is important to note that Roland|Criss is the first global organization to assist investment fiduciaries (i.e., Investment Advisors, Investment Stewards, and Investment Managers) acquire a fiduciary identity that conforms to the highest level of conduct – the Global Fiduciary Standard of Excellence.

This approach fulfills Galileo’s mandate to “measure what is measurable and make measurable what is not so.” Now the success of a 401(k) plan can be meaningfully measured with an eye towards the end result—providing participants with adequate retirement benefits and protecting fiduciaries in the process.