Fiduciary/Investment Training for
Trustees of Retirement and OPEB Funds
October 30, 2014
PANEL INTRODUCTIONS
MAUREEN TOAL
Public Agency Retirement Services (PARS)
Senior Vice President, Consulting
LORI BASILICO
Edwards Wildman Palmer LLC
Partner
DENNIS MULLINS, CPA, CFA
U.S. Bank
WHAT IS ERISA?
ERISA is the Employee Retirement Income Security Act
of 1974, a federal law that sets minimum standards for
retirement plans:
Requires accountability of plan fiduciaries
Generally defines a fiduciary
Gives participants the right to sue for benefits and breaches of fiduciary duty
WHAT IS THE ERISA FIDUCIARY
STANDARD?
A person is a fiduciary under ERISA:
To the extent he/she exercises any discretionary
authority or control respecting the management of a plan or disposition of its assets
To the extent he/she renders investment advice for a fee or has authority or responsibility to do so
If he/she has any discretionary or responsibility in administering a plan
WHAT IS THE ERISA FIDUCIARY
STANDARD?
The ERISA fiduciary standard applies to municipalities.
TRUE
DO FEDERAL RULES APPLY TO
GOVERNMENTAL PLANS?
A governmental retirement plan must do
non-discrimination testing.
TRUE
FALSE
A public pension has funding requirements under federal
law.
TRUE
WHAT ARE SOURCES OF FIDUCIARY
PROTECTIONS?
Where does a municipality get its fiduciary direction?
A. State Statutes
B. Judicial Opinions/Common Law C. Local Laws or Ordinances
D. Plan Governing Documents E. All of the Above
WHO REGULATES OUR RETIREMENT
PLAN?
What federal agency regulates governmental retirement
plans?
A. Department of Labor
B. Pension Benefit Guaranty Corporation C. Internal Revenue Service
HOW DOES THE IRS REGULATE OUR
PLANS?
Do you administer an IRS tax qualified or protected plan?
Pension or Mandatory Plan - IRC 401(a)
Voluntary Plan, Deferred Comp Plan – IRC 457
OPEB Trust – IRC 115 or VEBA IRC 501(c)(9)
Other Tax Protected Employee Benefits – FSA, Cafeteria Plan, Retirement Incentive etc.
Local pension plan?
Yes / NoIn state administered pension such as
Municipal Employees’ Retirement
Yes / NoSystem (MERS)?
For its own OPEB trust?
Yes / NoAs plan sponsor of 457 plan?
Yes / NoCAN YOU GET RID OF FIDUCIARY
RESPONSIBILITIES?
A municipality can get rid of fiduciary risk completely.
TRUE
FALSE
A municipality can mitigate or reduce fiduciary risk.
TRUE
Exercises any discretionary authority or control over
management of the plan
Excises any discretional authority over management
and disposition of assets
Has discretionary authority or control over the
administration of the plan
Gives investment advice for pay
WHO ARE FIDUCIARIES IN STATE LAW AND
CASE LAW?
WHO ARE FIDUCIARIES?
Who is a fiduciary to retirement plan or trust?
Plan Trustees
Governing Board Members
Investment Committee
OPEB Committee
Finance Staff
Investment Managers
Are any of these usually fiduciaries?
Accountants
Actuaries
Attorneys
Fund Employees
Health Consultants
Insurance Agents
Unions
Third Party Administrator/Recordkeeper
WHAT RHODE ISLAND LAWS
DO I NEED TO REVIEW?
§ 18-15-1 Prudent investor rule.
§ 18-15-2 Standard of care – Portfolio strategy – Risk and return objectives. § 18-15-3 Diversification.
§ 18-15-4 Duties at inception of trusteeship. § 18-15-5 Loyalty.
§ 18-15-6 Impartiality.
§ 18-15-7 Investment costs.
§ 18-15-8 Reviewing compliance.
§ 18-15-9 Delegation of investment and management functions. § 18-15-10 Language invoking standard of chapter.
WHAT DOES RI LAW SAY ABOUT
OPEB TRUSTS?
TRUSTEE: Treasurer or director of finance may enter into a trust agreement between the municipality and a corporate trustee.
DEDICATED TO OPEB: Shall be expended only for the payment of the costs payable by the municipality for OPEB.
PRUDENT PERSON RULE: Shall invest and reinvest the amounts in the OPEB trust fund in any investment permitted for the
municipality’s pension funds consistent with the prudent person rule and investment policies of the municipality, if any.
INVESTMENT ADVICE: A municipality may employ any qualified
bank, trust company, corporation, firm or person to advise it on the investment of the OPEB trust.
CAN A PLAN TRUSTEE BE SUED?
Cathy Lexin was HR Director for the City of San Diego when she was sued after the City’s pension plan became insolvent. By virtue of her position, she was required to serve as a volunteer trustee of the San Diego City Employees Retirement System (SDCERS). So too the Fire Chief and Treasurer.
But when she asked the City to defend her, her request was denied. She faced defending a $2 billion lawsuit with her own money.
How could this happen? And more importantly, could
this happen to other government workers?
WHAT IS EXCLUSIVE BENEFIT?
Governmental plans are still subject to the tax provisions
in Title II of ERISA that specify the qualification
requirements for tax exempt status.
Section 401(a)(2) of the Internal Revenue Code provides
that, in order to maintain its tax-deferred status:
“all contributions made to the retirement system, including
all earnings, must be held for the exclusive benefit of plan beneficiaries, and cannot be used for, or diverted to,
purposes other than the exclusive benefit of plan benefit beneficiaries.”
WHAT IS EXCLUSIVE BENEFIT?
Code of Ethics / Conflicts of Interest Policy
Board shall not deal pension assets for his or her own personal benefit or interest.
Board shall not act in any manner affecting the pension plan or on behalf of any person whose interests are adverse to the retirement system.
Board members shall not accept anything of value from any person or organization in connection with a transaction
DELEGATING FIDUCIARY RESPONSIBILITIES
What are examples of fiduciary duties?
A. Investment Selection B. Documenting Decisions
C. Selecting Service Providers D. Reasonableness of Fees
E. Monitoring/Supervising Service Providers F. Retaining Providers
PLAN GOVERNANCE DOCUMENTS
Which of the following should be in plan documents?
A. Identity of Fiduciaries B. Fiduciary Duties
C. Plan Governance D. Funding
E. Hiring Outside Experts F. Contracting
Slide 21
HG1 MT - I dont think the question makes sense. Should it be "Which of the following should be included in plan documents?"
DELEGATING FIDCUARY DUTIES
When delegating duties, who should you consult?
A. State Law B. Federal Law
C. Plan Documents
D. Common Law of Trusts – ERISA Like E. Town Counsel
WHAT QUESTIONS SHOULD YOU ASK
ABOUT FEES?
Are fees properly disclosed?
What services do the fees cover?
Is the plan paying for the same services that other service providers are providing?
Are fees competitive?
Are fees hard dollar or soft dollar?
Are there revenue sharing, e.g. 12(b) fees?
Is there a process to periodically review fees?
WHAT ARE BEST PRACTICES FOR
FIDUCIARIES?
Fiduciary handbooks/training/education
Review and update plan documents regularly
Hold regular meetings
Document decision-making processes
Properly delegate
Monitor co-fiduciaries and address breaches
Regularly review service provider fees and services
How do I know if my investment _______ is a fiduciary?
Investment Advisor
Investment Consultant
Investment Manager
Representative of A Broker-Dealer
Discretionary Trustee
Directed Trustee
A. Large Cap US Stocks (R 1000)
6.3%
B. International Stocks (EAFE)
6.1%
C. Small Caps US Stocks
(R 2000)
9.3%
D. Fixed Income (Barclays AGG)
5.7%
E. Real Estate (REITS)
14.5%
Total Return: Jan 1, 2000 – Aug 31, 2014
WHAT HAVE BEEN
Risk of loss in any one year?
Lack of predictability of returns?
Loss of purchasing power (inflation)?
Diversified in multiple asset classes?
Use of alternative investments such as hedge funds
and private equity?
HOW IS INVESTING FOR PENSION
AND OPEB DIFFERENT?
Durations of benefits
No direct way to hedge medical inflation, doesn’t correlate with CPI
OPEB typically has a much lower funding ratio, playing
OPEB liabilities are more volatile than pension from year to year
Many OPEB trusts only have prefunding money, little need for liquidity
INVESTMENTS AND ACTUARIAL
DISCOUNT RATE
Strategy Equity Range Target Equity Allocation Target LT ReturnConservative 25-40% 35% 6%
Moderate 45-60% 55% 7%
