“No one can serve two masters.”

Although the tradition is not mine, I can appreciate the rabbinic-like wisdom in the statement. Unfortunately, it appears that ERISA lawyers, on the whole, have not embraced this learning.

The statute, however, clearly is not agnostic on this topic.  Consistent with traditional trust-law concepts, and possibly not unaware of theology, ERISA demands a “duty of loyalty” by a fiduciary to the plan on whose behalf it is acting.

The language of statue is clear.  Dual loyalties are prohibited.  Nonetheless, ERISA lawyers (with the blessing of the courts) still continue to abide by the “two hat” doctrine.

Let me explain.

Two weeks ago, at a national conference of ERISA lawyers, a panel of in-house ERISA lawyers, reviewed a variety of issues that they encounter on a regular basis.  When the discussion shifted to fiduciary practices, one of lawyers explained the care and diligence that she employs when counseling the plan sponsor’s investment committee. This committee, of course, serves as a fiduciary to the retirement plans.  She said that she repeatedly recites or invokes the “two-hat” doctrine.

That is, in the day-to-day exercise of their corporate responsibilities, the officers owe a duty of loyalty to the shareholders of the corporation.  However, in the context of an investment committee meeting, they needed to “remove” their “corporate hat” and replace it with their “fiduciary hat”.  All decisions need to be made “in the best interests of the plan participants.”  They must disregard their duties to the corporation.

Upon recital of the two-hat catechism, every single participant on the panel nodded his or her head in agreement.   An ERISA truth had been proclaimed and knowledgable members of the ERISA bar mustered all of their reverential professionalism and genuflected at this statement of the canon.

Yes, it is commonly accepted that a corporate officer can “wear two hats”.  A chief financial officer, or a director of marketing, can spend his days (and often nights) toiling rigorously on behalf of the corporation (and shareholders), but during certain committee meetings they must shed this hat and instead, make a decision “solely in the interest of the participants and beneficiaries.”

Regularly, in corporations though out America, decisions are made related to $ trillions of retirement assets under this “two hat” theory.

For many years, I too sang from the two-hat hymnal, often a solo, just like the panel member.  However, with a bit of middle-aged experience and having weathered a systemic financial crisis, I have learned at times it can be valuable to question received wisdom, to question the hymnal.  And, sometimes even acknowledge the wisdom of traditions not my own.

For a moment, let’s set aside legal principles, theology, as well as editorial sarcasm, and examine the “real” world.

Another participant on that morning’s panel, explained that the retirement assets of her corporate plan (in excess of $15 billion) are “so important that the CEO personally appoints the members of the fiduciary committee.”

When a CEO handpicks members of a committee, everyone takes notice.   While CEO lieutenants may be adept at various technical and managerial skills, often, intense loyalty to the CEO is a common attribute.  (Dissidents typically do not typically rise to the C-suite).

This loyalty often includes a precise understanding of the CEO’s goals and priorities with respect to corporate strategy and is often rewarded by promotions, committee appointments, raises, bonuses, stock options and other assorted perks.  The senior managers are properly incentivized to advance the vision of the CEO.

Upon assuming a spot on a fiduciary committee, however, these same senior managers are required to shed the very skills that contributed to their corporate rise.  When making decisions on behalf of the plans, they are suppose to set aside any allegiance to the CEO, forget about the stock options they may have patiently accumulated over the years, and make decisions irrespective of an impact on corporate earnings.

The potential for conflicts of interest are real; they are not the abstract musings of lawyers and academics.   Many transactions squarely put the corporation and the plan on opposite sides, with competing goals.

So, can these corporate offices so deftly switch hats as ERISA lawyers assume?   Are fiduciary committee members so professional, so trustworthy, so ethical, that they are immune to the human impulses which gave rise to: “No one can serve two masters.”

Aren’t we all engaged in a collective willing suspension of disbelief as to the artifice of the two-hat theory?  Isn’t it time to say enough?  Let’s bring meaningful independence to the fiduciary oversight of the nation’s retirement plans.  The stakes are way too large not to.

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Cliche or Aspiration?

A $ Trillion Platinum Coin.  Sounds preposterous, no?  The idea was seriously being promoted by people who are not crackpots.  Paul Krugman, Nobel Prize winning economist and Mohamed El-Erian, CEO and co-chief investment officer of PIMCO have both publicly endorsed the idea.  Neither love the idea, but recognize that the current political environment demands, an “out of the box” solution.

“Out of the box” thinking… a term invented by business consultants, has now become a cliche, its use is so wide-spread it has become meaningless.  And, yet, every successful business person and investment professional know that novel and unconventional ideas or approaches lay the foundation for their success.

Like all cliches.  “Out of the box” thinking contains a germ of truth.

Harrison Fiduciary Group’s business model represents an “out of the box” business model for the management and oversight of retirement and pension plans.  However, time and time again, people say “but that is not how we do it.”   In fact, a few weeks ago I was proposing an idea to someone at a private equity firm.  He had degrees from two Ivy League universities, no doubt earned a sizable income, and yet, all he wanted to know was “who else is doing this?”.  He didn’t want to consider something slightly different.  He simply wanted to blend in with effort else.  Kinda reminds me of adolescence.

Unless circumstances demand novel and creative approaches, most people avoid them.   To use another cliche, most people are more comfortable with the “same ol’, same ‘ol”.

However, today’s economic, and investment environment demand an “out of the box” response. Corporate earnings are lack luster.  As I discuss in my prior post, interest rates are bound to increase and create a new investment environment never experienced by a generation of investment professionals.  And, in the midst of these pressures, there is talk of the Treasury Department issuing a $ Trillion Platinum Coin.

Things can’t get more topsy turvy.

How are corporate fiduciaries responding?  Do they have the time and the skills necessary to fashion appropriate investment responses?  But, more importantly, wouldn’t their time be better spent on executing their business strategies?  All too often fiduciary oversight deflects corporate focus from core business initiatives to the ancillary role of

At Harrison Fiduciary Group we are fiduciaries.  We are not investment consultants nor are we investment managers.  We are not “selling” a particular investment strategy nor are we merely offering advice to plan sponsors.

Instead, we are professional fiduciaries who will make and implement decisions on behalf of a plan.  And, most importantly we will stand by these decisions in a fiduciary capacity.  Our sole mission is to act in the best interests of plan participants and retirees.

Yes, HFG provides an “out of the box” solution to corporate fiduciaries.  Plan participants deserve no less.

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Pension Plans Must be Overseen by Real Investment Fiduciaries

Jeannie Kaplan, a member of the board of education of the City of Denver, explains that when she reviewed and approved a complicated financial transaction on behalf of the Denver teachers’ pension plan, “I sat there wanting to believe what they (Mssrs Bennet and Boasberg, respecitively, the superintendent and chief operation officer of the school system) were saying”.  This was Ms. Kaplan’s way of addressing a $400 million hole in the pension plan and assessing JP Morgan Chase’s proposed solution.

In retrospect she concludes, “The board probably should have had their own financial consultant.”

This revelation is buried deep in Gretchen Morgenson’s article, Exotic Deals Put Denver Schools Deeper in Debt, on the front page of today’s NY Times.  In great detail, Morgenson outlines the deal which the Denver public school system entered into with JP Morgan in order to address the $400 million dollar underfunding of the system’s pension plan. Not surprisingly the terms of the deal (for Denver) have turned south and are going to be costly.  Again, not surprisingly, it will likely turn out to be a rich deal for JP Morgan Chase.

Ms. Kaplan’s statements reveal a dark secret about the $ trillions held by private and public pension funds.  Many (and I would venture the vast majority) are overseen by people with little investment experience and knowledge.  In all likelihood, a review of the transaction by financial consultants would not have produced a different result.  My suspicion is that Ms. Kaplan and her colleagues would have rubber stamped the recommendations made by a consultant in the same way they rubber stamped the recommendations of Bennet and Boasberg.

Would Ms. Kaplan have asked a consultant penetrating questions about the assumptions, potential conflicts of interest or risks inherent in the transaction?  Probably not.  Because the chances are that Ms. Kaplan wouldn’t even know where to begin in asking these questions.

This is the shocking truth.  Many people serve as pension plan fiduciaries who do not even possess a rudimentary understanding of investment and financial principles.

Quite frankly, the participants in the Denver plan, along with the taxpayers deserve far better.  They deserve real fiduciary experts who understand the complexities of managing and overseeing pension plans.  Experts adept in assessing risk, prudent portfolio construction and monitoring various service providers to the plan.

Wall Street professionals are very smart and creative.  Probably much smarter on financial and investment matters than Ms. Kaplan and her colleagues.  Pension plans need fiduciaries who are an equal match to Wall Street.  I’m not suggesting, at all, that everyone on Wall Street is pedaling a scam transaction.  In fact, many Wall Street innovations have proven beneficial to markets and investors.

Instead, fiduciaries, acting on behalf of plan participants need to assess the risks they are assuming on behalf of the plans and assure that the plans are being properly compensated for these risks.  No doubt, any deal proposed by Wall Street, will be good for Wall Street.   Plan fiduciaries need to make sure that the deal is also good for the plan.

There is nothing to cause me to doubt Ms. Kaplan’s capabilities as an effective school board member.  However, she, and countless others, should recognize the limitations of the their skills and delegate their investment responsibilities to experts.  I’m not suggestion that they simply rely upon and rubber stamp recommendations by consultants, but rather delegate responsibility to those who will stand by the fiduciary decisions which they make on behalf of the plan participants.

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Corporate Officers Reluctant to Serve on Fiduciary Committees

Employee Benefit News, reports that HR managers face challenges in attracting and retaining the best employees to serve on fiduciary committees.  Potential committee members are concerned when they learn that fiduciary responsibilities open them up to personal liability for breaches of conduct.

Simply put, who needs that headache?  Even when indemnification is provided, being a defendant in a lawsuit is not what people what people bargained for when accepting the “honor” of serving on a fiduciary committee.  Years after the settlement of a lawsuit, a Google search will reveal this nugget of a committee members professional history.

These concerns are justified.  However, the hidden and unspoken concern is that many plan sponsors lack the infra-structure to support this fiduciary responsibility.  Without a doubt, the most important component of this infra-structure is the culture of fiduciary integrity.  Does the organization value the fiduciary obligations and the processes required to support these fiduciary roles?

Corporate officers may often feel that they cannot turn down appointment to  these committees — declining such a high profile committee assignment could be career-limiting.  Anyone who feels such pressure should take this as the “canary in the coal mine”, that possibly their organization neither understands nor respects the importance of these roles.

Anyone nominated to serve on a fiduciary committee should have an opportunity to ask questions about the role and the opportunity to decline.  Asking questions about a position reflects the very prudence required for the position.  At a minimum, the fiduciary candidate should ask the following questions:

1.  What does the role entail and why have I been selected?

2.  What professional staff will be available to assist and suport the committee?

3.  What training will I receive?

4.  How much time will I need to devote to this and how will it impact my other responsibilities?

5.  Can I review the charter of the committee as well as the fiduciary policies and procedures?

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