Jay Love


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  • Focus on saying that the first and last points are things that we’re hearing from our clients. HR departments don’t want to get that call asking them what they’re doing in the governance area and not have a coherent strategy/plan. DOL’s aggressive position is the position they’ve taken in the amicus brief they filed in Tittle vs. Enron. Their position asserts a significantly expanded fiduciary responsibility level for senior executives and boards Accounting firms will likely be looking at plans much closer as a result of the Enron plan issues Sarbanes-Oxley; 3 pending bills with expanded fiduciary penalties In Mercer’s 2002 People at Work survey , only 34% of employees agreed that they can trust management to always communicate honestly
  • Stakeholders in retirement plan governance need to have the right level of knowledge and the right skills to be successful in governing the plan. Through implementation of a plan policy, we can define job requirements and necessary skills and we can identify who should get what training when. The plan policy can also dictate what and how institutional plan knowledge can be preserved and passed on.
  • These are the types of issues raised by our clients and how are clients are addressing these issues.
  • Effective communication in the governance structure is critical to success. This is where a lot of companies fall down. Decision makers and other stakeholders need the right amount of information to make efficient and informed decisions. Reporting protocols establish what information goes to who and when.
  • Jay Love

    1. 1. FGFOA Good Governance – The Practical Aspect May 20, 2007 Jay Love, CFA - Mercer Investment Consulting Stuart Kauffman - Klausner & Kaufman, P.A.
    2. 2. Contents <ul><li>Fiduciary Implications </li></ul><ul><li>Fiduciary Responsibilities Relating to Investments </li></ul><ul><li>Best Practices for Plan Governance </li></ul>
    3. 3. Public vs. Private Sector <ul><li>Public </li></ul><ul><li>Fiduciaries only act in a fiduciary capacity </li></ul><ul><li>Public scrutiny </li></ul><ul><li>Must work with the legislature </li></ul><ul><li>Subject to state statutes, Attorney General opinions </li></ul><ul><li>Fully discretionary trustee </li></ul><ul><li>Private </li></ul><ul><li>Fiduciaries act in fiduciary and non-fiduciary capacity </li></ul><ul><li>Limited visibility </li></ul><ul><li>Self governing </li></ul><ul><li>Subject to ERISA and Internal Revenue Code and DOL opinions </li></ul><ul><li>Typically, directed trustee </li></ul>
    4. 4. Difficult Circumstances with Fiduciary Implications <ul><li>Legislative enactment jeopardizes funding of the trust </li></ul><ul><li>Trustees have fiduciary obligation to provide for payment of benefits </li></ul><ul><li>Trustees should seek legal opinion for guidance </li></ul><ul><li>Reliance upon independent legal advice is evidence of prudence </li></ul><ul><li>Trustees may be required to initiate legal action </li></ul><ul><li>Must balance the costs of litigation (including the intangible costs of public opinion) with the likelihood of prevailing </li></ul>
    5. 5. Mitigating Fiduciary Liability <ul><li>Orientation and continuing fiduciary education </li></ul><ul><li>Thorough decision-making processes </li></ul><ul><li>Clear documentation of Board actions </li></ul><ul><li>Expert advice in investments </li></ul><ul><li>Legal review prior to making investments </li></ul><ul><li>Good governance and ongoing oversight activities </li></ul><ul><ul><li>Know the risks </li></ul></ul><ul><ul><li>Understand the expectations </li></ul></ul><ul><ul><li>Have and adhere to careful, thorough, scrupulous policies </li></ul></ul><ul><ul><li>Orderly processes </li></ul></ul><ul><ul><li>Judge oneself before others do </li></ul></ul>
    6. 6. Practical Advice <ul><li>Have an annual “booster shot” on fiduciary responsibility </li></ul><ul><li>Have ethics and conflicts of interest policies in place to guide you and be trained on what they mean </li></ul><ul><li>Set up ways to monitor and evaluate yourselves as trustees </li></ul><ul><li>Recognize that the staff may find it difficult to point out fiduciary breaches to the trustees </li></ul>
    7. 7. Fiduciary Responsibilities Relating to Investments <ul><li>Fiduciaries must follow an appropriate process with respect to the selection and monitoring of investments and managers </li></ul><ul><li>Fiduciaries must have a process to confirm that third parties are complying with their obligations </li></ul><ul><li>Fiduciaries must do more than simply monitor the performance of an investment against a benchmark </li></ul>
    8. 8. <ul><li>Planning </li></ul><ul><li>Determine types of investment options to provide a broad risk/return spectrum; establish criteria for selection of funds </li></ul><ul><li>Select a trustee to account for Plan assets </li></ul><ul><li>As necessary or appropriate, select an investment advisor or expert, to render advice to the trustees </li></ul><ul><li>Establish performance standards for each investment fund </li></ul><ul><li>Select investment managers based on fund objectives </li></ul><ul><li>Communicate responsibilities, objectives, guidelines to fiduciaries </li></ul>Investment Oversight Typical responsibilities
    9. 9. <ul><li>Operations </li></ul><ul><li>Delegate responsibilities, as appropriate </li></ul><ul><li>Delegate administrative duties, as appropriate </li></ul><ul><li>Control </li></ul><ul><li>Review and evaluate the results of the investment funds and service providers against the established performance standards </li></ul><ul><li>Take whatever corrective action is deemed prudent and appropriate when an investment fund fails to perform against established policy objectives, guidelines and standards </li></ul>Investment Oversight Typical responsibilities
    10. 10. <ul><li>Procedural Due Diligence - process for making high-quality, prudent fiduciary decisions and documenting the decision making process. Procedural due diligence with regard to investments involves the following: </li></ul><ul><li>Read the investment related documents and highlight the costs, level of risk, and expected return (more DC related) </li></ul><ul><li>Determine whether the fees associated with the investments are reasonable </li></ul><ul><li>Demonstrate that the investments are reasonably designed to further the purposes of the plan and are consistent with the plan’s funding policy and method </li></ul><ul><li>Review investment alternatives and, where appropriate, obtain competitive bids </li></ul>Investment Oversight Best practices
    11. 11. Investment Oversight Best practices (cont.) <ul><li>Review the historical performance of the investment </li></ul><ul><li>If necessary, hire an expert to help in the decision-making process, consult with advisors, and engage independent fiduciaries where conflicts arise </li></ul><ul><li>Make arrangements to receive regular information about the performance of the investments, review the information promptly, and follow up on material discrepancies </li></ul><ul><li>Document all of the above in a policy statement and maintain a file of reports, meeting notes, analyses and legal documents </li></ul>
    12. 12. Reducing Fiduciary Exposure <ul><li>Clearly allocate responsibilities among qualified fiduciaries in the Plan-related documents </li></ul><ul><li>Properly document fiduciary actions </li></ul><ul><li>Obtain fiduciary liability insurance that is adequate in scope and amount </li></ul><ul><li>Adopt appropriate indemnification provisions </li></ul><ul><li>Follow carefully considered policies to demonstrate compliance with fiduciary responsibilities </li></ul><ul><li>Adopt and follow written procedures </li></ul><ul><ul><li>Use of plan assets </li></ul></ul><ul><ul><li>Vendor selection and monitoring </li></ul></ul><ul><ul><li>Investment policy </li></ul></ul><ul><ul><li>Avoiding conflicts </li></ul></ul><ul><ul><li>Documentation and document retention </li></ul></ul>
    13. 13. Mercer Human Resource Consulting Best Practices for Plan Governance
    14. 14. What Is Retirement Plan Governance? <ul><li>Simply put, the system or framework under which a retirement plan operates </li></ul><ul><li>Governance defined </li></ul><ul><ul><li>WHAT is being done to operate and oversee the plan </li></ul></ul><ul><ul><li>by WHOM </li></ul></ul><ul><ul><li>HOW OFTEN </li></ul></ul><ul><ul><li>HOW is it being done in order to be effective </li></ul></ul>
    15. 15. Why the Current Focus? <ul><li>Individual liability for breaches of fiduciary responsibility by plan fiduciaries </li></ul><ul><li>Boards likely to be held more responsible than ever </li></ul><ul><li>Poor investment markets of the past and underfunding attracting attention </li></ul><ul><li>Department of Labor’s aggressive position in Enron case (SEC, S&P, Moody’s, NASDAQ, IASB, DOL, IRS) </li></ul><ul><li>Possibility of public embarrassment </li></ul><ul><li>Employee trust levels low (whistleblowers) </li></ul>
    16. 16. “Five Principles” to Effective Plan Governance Written Plan Policies Appropriate Accountability Rigorous Oversight & Monitoring Effective Information Flow Effective Boards/ Committees Effectively Governed Retirement Plans
    17. 17. Effective Boards/Committees Key issues <ul><li>What is the purpose of the committee? </li></ul><ul><li>Are meetings unbiased? </li></ul><ul><li>Are agendas circulated prior to meetings? </li></ul><ul><li>Are detailed minutes kept of meetings? </li></ul><ul><li>Do the trustees/staff have the appropriate training? </li></ul><ul><li>Are the right (wrong) people on the Board? </li></ul>Effective Committees
    18. 18. Written Plan Policies Key issues <ul><li>Are there policies that cover governance and oversight around: </li></ul><ul><ul><li>Investments </li></ul></ul><ul><ul><li>Conflicts of interest/ethics </li></ul></ul><ul><ul><li>Plan funding and accounting </li></ul></ul><ul><ul><li>Benefits </li></ul></ul><ul><ul><li>Administration </li></ul></ul>Written Plan Policies
    19. 19. Appropriate Accountability Key issues <ul><li>Are roles and responsibilities in the governance structure clear ? </li></ul><ul><li>Are decisions made by the appropriate people? </li></ul><ul><li>What activities of the plan should be delegated and to whom? </li></ul><ul><li>Are plan delegations clear, sufficiently documented and appropriate? </li></ul><ul><li>Do contractual agreements with third-party service providers establish clear and measurable standards of performance? </li></ul>Accountability
    20. 20. Rigorous Oversight & Monitoring Key issues <ul><li>Is the plan regularly measured and monitored for accuracy and effectiveness with respect to: </li></ul><ul><ul><li>Investments </li></ul></ul><ul><ul><li>Administration </li></ul></ul><ul><ul><li>Compliance </li></ul></ul><ul><ul><li>Design/Adequacy </li></ul></ul><ul><li>Are service providers regularly monitored? </li></ul><ul><li>Is there sufficient oversight of data integrity, quality control and file organization/retention? </li></ul>Rigorous Oversight & Monitoring
    21. 21. Effective Information Flow Key issues <ul><li>Do the plan’s decision-makers: </li></ul><ul><ul><li>Have timely access to accurate information? </li></ul></ul><ul><ul><li>Communicate effectively? </li></ul></ul><ul><ul><li>Communicate with the sponsoring entity? </li></ul></ul><ul><li>Are outside vendors and consultants given timely and accurate information? </li></ul><ul><li>Do outside vendors provide the appropriate level of information? </li></ul><ul><li>Are there formal reporting protocols that address the form, content and timing of communications made throughout the retirement plan governance structure? </li></ul>Effective Information Flow
    22. 22. In Summary — Fiduciary Responsibility <ul><li>Who is a fiduciary for your system? </li></ul><ul><li>What are the applicable fiduciary standards? </li></ul><ul><li>Are the standards understood by those who need to know them? </li></ul><ul><li>Are procedures in place to make sure fiduciary standards are being met? </li></ul><ul><li>How do you maintain your knowledge regarding fiduciary responsibilities? </li></ul><ul><li>What resources do you need to be confident that you are meeting your fiduciary responsibilities? </li></ul>
    23. 23. Questions?