Once Again, Strong Process and Substance Matters

There is not much love lost by the Department of Labor for ESOP transactions.  The skepticism, even antipathy, is somewhat justified.  Some ESOP transactions don’t pass the smell test (see my prior post:  ESOPs: Common Sense Required).

And yet, ESOP transactions continue.  Notwithstanding the bad deals, there are economic benefits to ESOP structured transactions.  Fortunately, however, ESOP fiduciaries now can operate with clearer direction from the Department of Labor.

At the beginning of the summer, the Department entered into a Settlement Agreement in Perez v. GreatBanc Trust Co with respect to an ESOP maintained by the Sierra Aluminum Company.  This Settlement Agreement afforded the DOL the opportunity to issue guidance which has the look and feel of regulations, without having to go through the long process of issuing regulations.

In short, DOL requires that the fiduciary be an active participant in an ESOP transaction.  The fiduciary must determine that financial projections are reasonable, take steps to assess the accuracy of financial data, review the selection and valuation process of the expert appraiser, and generally assure that a prudent process has been followed and documented.  This is far from a passive role.

At Harrison Fiduciary Group we have drafted a set of fiduciary policies and procedures which closely adhere to the terms of the GreatBanc settlement.   In general these procedures focus on the following:

  1. Valuation Advisor — review of qualifications, selection process, no conflicts of interest, analysis of valuation work-product;
  2. Financial Statements — reasonable reliance on financial statements;
  3. Fiduciary Process — written documentation of processes, and reliance upon valuation report; and
  4. Miscellaneous — Preservation of documents, purchase or sale of securities for fair market value (debt not to exceed fair market value of securities), consideration of a claw-back.

In light of the GreatBanc settlement and the general enforcement pressure being brought to bear by the DOL on these transactions, some institutional fiduciaries are exiting the ESOP marketplace.  They are unwilling to assume the risks highlighted by the Department and the Courts. This market disruption might cause concern for some service providers, but at HFG we view this as a significant opportunity.   Our competency and expertise as fiduciaries should give comfort to both plan sponsors and to the Department of Labor.  As is true for each of its fiduciary engagements,  HFG rigorously complies with its own policies and maintains contemporaneous written documentation of its process. ESOP engagements will fare no differently.

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Is it a Good Deal?

Employee Stock Ownership Plans (ESOPs) present an attractive financing tool and ownership structure for both publicly and privately held businesses.

ESOPs can be very complex.  There are many moving parts.

Lawyers, investment bankers, consultants and other advisors love complexity.  In fact, professionals often thrive on complexity.  Somehow complexity conveys an aura of expertise, and of course, expertise demands high fees.

However, the structuring of an ESOP and the decision-making process undertaken by the various stakeholders (plan sponsors, plan fiduciaries, advisors, etc.) should not overlook very simple questions:  “Is this a good deal?”  “Do the economics work?”.

In transactions of this nature, there is lots of pressure to “get the deal done.”  Pressure by selling shareholders and pressure by the bankers can all be significant.  But, it is a fiduciary’s job to ask the simple questions.

In Fish v. GreatBanc, a recent decision by the Seventh Circuit, the Court outlines what amounted to a bad business deal.  Although the precise issue decided by the Court focused on the application of the relevant statute of limitations, the underlying business deal was not pretty.

As noted by the Court, and repeated by other bloggers, Steve Rosenberg, What Happens to Company Owners Who Get Overaggressive When Selling out to an ESOP?, outsider advisors to the independent fiduciaries characterized the transaction as “the most aggressive deal structure in the history of ESOPs.”

Wow.  When an advisor puts that warning in writing it is best to pay attention.  (Remember, it will be part of the record if the deal heads south.)

While many lawyers have commented on the legal issues, I’d like to provide a practical perspective, as an Independent Fiduciary.

At the outset, it is important to note that “aggressive” –taken by itself — is not necessarily a negative or a bad thing.

Many “aggressive” investments may still be prudent. But, in the parlance of modern portfolio theory, an aggressive, or high-risk investment, must be compensated for by a higher rate of return.  High risk.  High Return.

In addition, the risk of an investment must be assessed in the context of the composition of an entire investment portfolio.  High risk investments must be balanced with lower risk investment so that the overall portfolio reflects an appropriate risk level.

ESOPs present a unique challenge when it comes to risk.  That is, the company stock held by the ESOP is the sole asset held by the plan (other than some cash).

In the context of Fish, once the deal was characterized as “aggressive”, it was then the fiduciary’s responsibility to dig in.  What gives rise to the nature of the aggressive nature of the deal?  Are there ways to mitigate the aggressiveness?  Can the plan be adequately compensated for the risk inherent in the transaction?

This analysis must be a collaborate effort, undertaken by the fiduciary, the plan sponsor, and the selling shareholders.  The analysis is not intended to kill the deal.  To the contrary, the analysis is designed to enhance the deal, to afford protections to everyone involved, not the least of whom are the plan participants who must get a fair deal.

ESOPs can be very compelling structures for all stakeholders:  owners, plans and plan sponsors.  However, it is the fiduciary’s responsibilities to make sure that the risks and rewards are prudently shared.

As an Independent Fiduciary, it is my job to exercise discretion as a “prudent expert”.  While prudence includes following various processes and procedures, it also demands me to ask, “Is this a good deal for the plan?”   Financial advisors and investment bankers, it is your job to persuade me that, in fact, it is a good deal.

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Seems Like Some Fiduciaries May Be Asleep at the Switch

The SEC is attempting to cast some sunlight on to the tangle of fees charged by private equity firms.  The Deal’s Done. But not the Fees, Gretchen Morgenson.  My question, as if often the case is, “Where are the plan fiduciaries?”

Moregenson points out that in addition to the typical “2 and 20” fee arrangement (2% management fee, 20% performance fee), private equity advisory firms charge investors a host of other fees, many of which are buried deep in disclosure and other documents.

The SEC, apparently, is now hip to these tricks.

Morgenson notes that private equity investments constitute $3.5 trillion of the $64 trillion asset management industry.  The Investment Company Institute reports that as of December, 31, 2013, total US retirement assets were $23 trillion. With respect to these assets, managers must not only abide by the rules of the SEC, but also ERISA (the Employee Retirement Income Security Act of 1974).  Admittedly, many private equity funds are structured in a manner designed to avoid ERISA, however, not all are so structured.

ERISA imposes a regulatory regime which is materially different than the regulatory regime imposed by the securities laws. Whereas the securities laws rely heavily upon the “sunshine” of disclosure, ERISA places affirmative duties on fiduciaries with respect to the investment and monitoring of plan assets.

Therefore, the SEC’s efforts should be supplemented by the Department of Labor.  While the SEC can direct its attention on the advisors, the DOL can focus on plan fiduciaries.

The questions for the plan fiduciaries are simple:

  1. Were they aware of theses intricate fee arrangements?
  2. Did they analyze and review the various fees?
  3. Did they conclude that the fees are reasonable and sign-off on the reasonableness of the fees?

ERISA requires that fees paid out of plan assets must be reasonable.  In fact, a couple of years ago new regulations were issued related to plan expenses.  Mutual funds and various other plan service provides have been jumping through hoops to comply with these new regulations.  What about private equity funds?

Another ERISA concern revealed by Morgenson relates to various relationships which might give rise to conflicts of interest.  Again, ERISA takes a different approach than the securities laws.  Under the securities laws, generally, disclosure is sufficient to “cure” a conflict of interest.  The thinking is that once effectively disclosed, sophisticated investors can consent to these conflicts.

Not so under ERISA.

ERISA contains a set of requirements which preclude a series of transactions known as “Prohibited Transactions”.  The types of transactions are fairly explicit, and, simply put, they are prohibited, not allowed, barred.   It’s really plain english.   Disclosure and consent are not remedies.  Conflicts of interest clearly constitute Prohibited Transactions.

Allowing a plan to engage in a prohibited transaction constitutes a breach of fiduciary duty under ERISA.  Therefore, plan fiduciaries typically are vigilant in detecting these prohibitions.

At a minimum, in light of Morgenson’s article, and the SEC’s questioning, plan fiduciaries need to examine whether in fact a plan’s private equity investments is subject to ERISA.  If it is, then further diligence may be necessary.

These concerns are not intended to disparage private equity investments.  Private equity managers have delivered consistent returns for their investors over the past decades.  But, like any investment, past performance is not a guarantee of future results.  Private equity investments clearly can play a role within a larger portfolio of plan investments.

However, private equity investment structures need to pass the same regulatory scrutiny imposed upon all other advisors and services providers to retirement plans.

Morgenson’s article suggests that possibly plan fiduciaries may have been asleep at the switch.  Her article puts fiduciaries on notice as to where they should be directing some attention.

Any fiduciary not up to the task of demanding information and asking hard questions of private equity advisors should delegate that task to fiduciaries who are prudent experts.  Plan participants and beneficiaries deserve no less.

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“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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An Independent Fiduciary Protects All Parties

With rising interest rates and CEO’s tired of pension-related balance sheet surprises, the volume and size of annuity transactions is bound to explode.

Experience teaches that exuberance in financial markets and products can lead to some very painful losses.  The Department of Labor is concerned.  It has seen this movie more than once.

Multiple factors go into the corporate decision to “de-risk” the balance sheet by purchasing annuity contracts.  Months of work go into this decision.  One key factor is the cost of the annuity, as well as the cost of executing the transaction.  While these transactions can be expensive to execute, senior corporate managers are also incentivized, and have a duty of loyalty to the company, to minimize these expenses.  Lower expenses enhance earnings.

However, annuity pricing is efficiently correlated to the credit quality of the issuer of the annuity.   In other words, lower credit-quality issuers charge less for their products.  The corollary is also true; higher credit-quality annuities are more expensive.

Left to their own devices, corporate managers are incentivized to purchase the cheapest annuity available even if it reduces the credit quality of the issuer.  This pressure is very strong.

Plan fiduciaries and participants, however, have a different view.  They are interested in the strongest credit quality issuer available, price be damned.  Remember, prior to the annuity purchase, the pension plan is funded by a diversified pool of assets, thereby mitigating investment risk.

An annuity purchase,however, substitutes a single issuer for this diversified pool.   The pensions of thousands of plan participants are dependent on this single issuer.  The issuer goes bankrupt, the pensions are lost… forever.

The conflicts for senior managers (some of whom are plan fiduciaries) in executing these transactions are real.  Should they pay up for higher credit quality; or, should they sacrifice credit to enhance earnings.

ERISA provides a single answer.  Fiduciaries must act in the interests of participants.

In the early 1990’s the bankruptcy of Executive Life Insurance Co. provided a huge wake-up call.   Many plans were invested in Exec Life products and they absorbed huge losses.

In response,  the DOL issued guidelines in IB 95-1 setting forth numerous requirements regarding the purchase of annuity contracts.  Post-Executive Life,  the DOL requires that a plan purchases the “safest available annuity”.   In reaching this determination, the DOL requires that 6 six factors be analyzed, price of the annuity is not one of the factors.

Recognizing the potential conflicts of interest and the competing pressures of corporate managers, these IB 95-1 suggests that an independent fiduciary be hired to make the the “safest available annuity” determination.

Unfortunately, plan sponsors don’t like hiring Independent Fiduciaries. They don’t like paying the fees and they don’t like a second set of eyes reviewing their judgments.  If corporate managers want to purchase an annuity from XYZ Insurance Co, they don’t want a third party telling them that they should purchase the annuity from DEF Insurance Co.  And, they really don’t like that an Independent Fiduciary will retain its own lawyers and advisors for the transaction.

Ironically,  the intensity of the resistance by senior managers to hiring an Independent Fiduciary actually illustrates and proves the very conflicts of interest outlined above.

Corporate managers who forgo an Independent Fiduciary might one day be in the position of having to prove to the Department of Labor that they transcended these conflicts and acted in the interests of plan participants.  In the context of large losses (possibly $ billions) That will be a hard argument to make.  The DOL will be very suspicious.  Remember, there is personal liability for breaches of fiduciary duty.

In the end, an Independent Fiduciary will make decisions in the interest of the plan participants.  However, the corporate managers can take great comfort from knowing that the conflict of interest is significantly mitigated by the hiring of the Independent Fiduciary.  Whether they understand it or not, the Independent Fiduciary provider significant protections to the corporate managers.

Corporate managers should focus on executing their corporate strategies.  Let the Independent Fiduciaries wrestle with the complexities of purchasing annuity contracts.

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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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Only if We Let It Be

As one year ends and the next begins, it is important to ask whether the past predicts the future.  Ironically, the investment management industry is built upon a widely disclosed truism: “PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE”.  Warnings of this nature accompany every investment product.

While the past does not predict the future, actions taken in ignorance of the past can be risky, and dare I say, imprudent.  In my last post I focused on inflation, however, the concern goes way beyond inflation.

Floyd Norris reviews over 60 years of bond market history, Reading Pessimism in the Market for Bonds, and without resorting to overwhelmingly sophisticated analysis (an analysis that even I, a mere lawyer can follow) identifies 30 year swings in the bond market.   From the the bear market of 1946-1981 and the bull market from 1981- present, he anticipates the start of another 30 year long grinding bear market in bonds.

Given this trend, the mere flip of the calendar page from 2012 to 2013 should give us pause.  If this is not sufficient to cause some hesitation and concern, look to the historically meager interest rates being paid to bondholders.  At some point, and probably some time sooner rather than later, the deluge of investment into bonds will reverse its course. The reverse tidal wave could be devastating to investment portfolios of all stripes. .

While the practical implications of a down bond market concern me, I am even more concerned about whether the investment managers and other decision making fiduciaries are up to the task of making the significant intellectual paradigm shift from bull market to bear market.

Within Norris’ column, Michael Gavin, the head of U.S. asset allocation for Barclasys, identifies a fact which I have also addressed before… with great concern.   Most investment fiduciaries have never operated in a bear bond market.  The skills that they have honed and perfected (whether in equities, fixed income or alternatives) are all products of a 30 year bull market in bonds.

What happens when that market changes, fundamentally? Not a mere blip such as 1994 which saw a short-term uptick in interest rates, only to be followed by the overwhelming bull market trend which has lasted almost another 20 years, but the real McCoy;  a long 30 year trend of rising interest rates and falling bond prices.

Let me be clear.  I am not suggesting that I have the answers.  However, when I turn to other investment fiduciaries, I am not looking for the same re-heated, cliched solutions of the last 30 years. Instead, I am looking for managers and advisors who are able to look at the past 60+ years of investment management trends and investment philosophies and extract principles and lessons which are applicable today.

And yet, it is not all about the past.  The present presents challenges and a new world.  In 1982 as the bond market started its ascent, baby boomers were hitting the work force and engaged in their own ascent up the corporate ladder.  Today, retirement looms, pension savings must be accessed thereby putting even further downward pressure on the bond market.  Debt explodes everywhere: invididuals, corporations and sovereign nations.  These are merely a few of the most obvious challenges.

For the past not to be prologue, I am keeping my eyes open for the investment managers who know their history, are fluent with the challenges of the present, and most importantly, have fashioned an investment approach with a full understanding of both.

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Can We Learn from History?

In the summer of 1982 Henry Kaufman, the legendary Dr Doom announced that interest rates had peaked.  I was a summer associate working at a law firm, but I remember that the stock market instantly skyrocketed.  Interest rates had peaked, inflation was licked, and it was smooth sailing ahead.

Essentially, my entire career (and the careers of an entire generation of investment professionals) has been spent in a falling interest rate environment.  From 1981 through 2012, the yield on the Treasury Bond has fallen from just below 16% to below 1.5%.

This decline in interest rates corresponds with an explosion in stock prices, both here in the US and globally; in developed markets and developing markets a like.  Furthermore, this same period is also reflects a benign inflationary period in the U.S.

I’m not stating anything new or earth shattering.  However, I do wonder about the effects of this generational experience upon the professional investment industry.  There are few advisors or managers out there who successfully managed assets in a steadily increasing rate environment or during periods of rapidly increasing inflation.

Are rates rising?  What about inflation? Who knows?  And, I certainly do not even begin to posses the skills to analyze these issues.

However, I can look at a simple graph and see trends … or the lack of trends…. and it flies in the face of reason to think that low interest rates and low inflation will continue forever. Therefore, if nothing else, fiduciaries should begin thinking maybe even worrying about inflation and an eventual upturn in interest rates.

While I would never shill on behalf of one manager over another, I nonetheless attended a very impressive presentation by a highly regarded investment management firm in which they laid out their case for the building inflationary pressures and their proposed solutions for this potentially new environment.

Historically, certain asset classes perform well in an inflationary environment: inflation linked bonds, currencies, gold, commodities, real estate. While they are not suggesting a dramatic shift to these asset classes, they nonetheless do recommend gradually incorporating exposure to these assets.

Fiduciaries should evaluate these proposals.  If they choose, they should also feel free to reject them in favor of other perspectives or strategies.  The real issue is that Fiduciaries should not simply rely on the “same ol’, same ol’” practices.  To do so, would be imprudent.

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Are Plan Sponsors Up to the Task?

The responsibility for managing and overseeing a corporate retirement plan use to be back a backwater support function at most companies.  The Department of Labor, however, has just significantly upped the ante for overseeing these plans.

Yesterday, Gretchen Morgenson reported on the new fee disclosure requirements pertaining to $401(k) plans, The Curtain Opens on 401(k) Fees.  As the open curtain metaphor suggests, transparency will be important.  However, the new rules can’t simply be fulfilled through transparency.  It’s going to take more… a lot more.

Morgenson explains that the new rules will require plan sponsors to calculate and disclose expense ratios for each of the investment options offered to the plan participants.  With access to greater information, it is assumed that plan participants will be able to make more informed decisions with respect to their investment selections.  For everyone knows, that higher expenses eat into investment returns.

Just as plan sponsors are being required to assume additional responsibilities, however, Morgenson also reports that many managers of corporate plans are shockingly ignorant about the nuts and bolts of the operation of their retirement plans; specifically, on the expense structure of the plans. I have previously commented on then dangers of executive ignorance with respect to retirement plans. Fees & Expenses: A Perfect Storm.

The importance of these new regulations, however, is not simply that they demand greater transparency.  The significant challenge lurking under the surface for corporate managers or retirement plans is that they will now be fiduciaries with respect to the fees and expenses paid by the plans.

That is, it is not enough that they properly disclose all the various fees and expenses paid by the plan.  In addition, they will also have to sign off on the reasonableness of these fees and expenses.

Disclosure is a somewhat passive activity.  If it were merely a matter of disclosure, then plan sponsors would simply hire consultants to calculate the expense ratios and then pass those ratios along to the participants.

As fiduciaries, however, the plan sponsors must make the affirmative decision that the fees and expenses are reasonable.  This requires that they understand the economics and the entire expense structure of the plans, and affirm that the charged expenses are reasonable.

Approving fees and expenses will require a thorough understanding of the range of services and pricing for all aspects of maintaining and operating retirement plans.  The fiduciaries must make their decisions in their capacities as prudent experts.

No doubt, plan sponsors will hire consultants to assist with these determinations.  However, it is axiomatic under ERISA that plan fiduciaries cannot merely rubber stamp a recommendation made by consultants.  Or, if in fact plan fiduciaries do rubber stamp consultant recommendations, they are opening themselves up to liability.

And remember, under ERISA, fiduciaries are personally liable for breaches of fiduciary liability.

Maybe it is time for companies to get out of the plan management business.  The best course of action would be to delegate the responsibility for management and oversight of plans to proven fiduciary experts.   Independent professionals who are experts in the business of maintaining and operating plans.

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An Independent Fiduciary Can Be Your Best Friend (and Security Blanket)

No one has the right answer.  This weekend’s news papers and financial blogs are filled with every prediction imaginable (from economic disaster to boons) and financial advice to fit each prediction.

With the markets swinging 500 points in opposite directions, this is not the time to embark on market predictions and changes in investment strategies.

Steep, drastic price plunges are not fun.  Like the free-fall drop on a roller-coaster when your stomach does its own loop-de-loop, these prices plunges elicit a real and physical reaction.  Panic is scary.  A racing heart beat, cold sweats and sleepless nights are subjects of cliches.  But, when you are experiencing it yourself, it ain’t a cliche.  It is very real.

From the deepest wells of our very being, panic surges forward.  The visceral emotional response becomes its own reality.  Emotion as reality.  That is never a good place to be. And certainly, not a time to be making decisions.

Prudence on the other hand, provides the required antidote to panic.  In the perennial push and pull between heart and mind, prudence provides the counter-weight to panic. Defined as “care, caution and good judgment, as well as wisdom in looking ahead” (see, www.dictionary.com), prudence requires the mind to prevail over the heart.

The key to extracting oneself from the distorted reality of pure emotions, one needs a trigger, or a technique to break the panic spiral.  Within the world of managing and overseeing retirement assets, care, caution and good judgment can be supplied by an Independent Fiduciary who can review and assess your portfolios against the plan’s Investment Policy Statement (IPS).  Call her.  She is paid to be prudent.

Hopefully drafted with the assistance of professionals and during a period of lessened volatility and other external pressures, an IPS reflects the prudent judgment of plan fiduciaries.  The IPS, in effect, is the road map for wisdom in looking ahead.  An Independent Fiduciary should always have the IPS in hand.

Have the investment performance of each of the plans’s asset classes evaluated.  Determine if any portfolios need to be re-balanced in order to reflect the allocation among assets classes envisioned by the IPS.  Instruct your Independent Fiduciary to make certain recommendations and then implement them.

Taking specific prescribed actions can deflate the power and energy of panic.  The key is to make sure that these actions had been well thought through before the specter of panic arises on the horizon.  An Independent Fiduciary can help allay the fear and the imprudent actions which a volatile market environment can inspire.

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