Fiduciary/Investment Training for Trustees of Retirement and OPEB Funds

Transcription

1 Presentation to Rhode Island GFOA Fiduciary/Investment Training for Trustees of Retirement and OPEB Funds October 30, 2014

2 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 Senior Portfolio Manager 2

3 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 3

4 WHAT IS THE ERISAFIDUCIARY STANDARD? ApersonisafiduciaryunderERISA: 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 4

5 WHAT IS THE ERISAFIDUCIARY STANDARD? The ERISA fiduciary standard applies to municipalities. TRUE FALSE 5

6 DO FEDERAL RULES APPLY TO GOVERNMENTAL PLANS? A governmental retirement plan must do nondiscrimination testing. TRUE FALSE A public pension has funding requirements under federal law. TRUE FALSE 6

7 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 7

8 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 D. All of the Above 8

9 HOW DOES THE IRSREGULATE 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. PLRs or Letter of Determinations 9

10 IS A MUNICIPALITY A FIDUCIARY? Local pension plan? In state administered pension such as Municipal Employees Retirement System (MERS)? For its own OPEB trust? As plan sponsor of 457 plan? Yes / No Yes / No Yes / No Yes / No 10

11 CAN 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 FALSE 11

12 WHO ARE FIDUCIARIES IN STATE LAW AND CASE LAW? 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 12

13 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 Investment Advisors 13

14 WHO ARE FIDUCIARIES? Are any of these usually fiduciaries? Accountants Actuaries Attorneys Fund Employees Health Consultants Insurance Agents Unions Third Party Administrator/Recordkeeper 14

15 WHAT RHODE ISLAND LAWS DO I NEED TO REVIEW? Prudent investor rule Standard of care Portfolio strategy Risk and return objectives Diversification Duties at inception of trusteeship Loyalty Impartiality Investment costs Reviewing compliance Delegation of investment and management functions Language invoking standard of chapter Application to existing trusts Uniformity of application and construction. 15

16 WHAT DOES RI LAW SAY ABOUT OPEBTRUSTS? 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. 16

17 CAN A PLAN TRUSTEE BE SUED? CathyLexinwasHRDirector forthecityofsandiego whenshe 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? 17

18 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. 18

19 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 involving the retirement system. 19

20 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 G. Terminating Provider 20

21 PLAN GOVERNANCE DOCUMENTS Which of the following should be in plan documents? HG1 A. Identity of Fiduciaries B. Fiduciary Duties C. Plan Governance D. Funding E. Hiring Outside Experts F. Contracting 21

22 Slide 21 HG1 MT - I dont think the question makes sense. Should it be "Which of the following should be included in plan documents?" Hannah Grady, 10/20/2014

23 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 F. All of the Above 22

24 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? Is service provider delivering agreed upon services? 23

25 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 Establish and follow conflicts of interest policy Consult fiduciary counsel 24

26 WHAT DO INVESTMENT TITLES MEAN? 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 25

27 WHAT HAVE BEEN BEST PERFORMING ASSET CLASSES? A. Large Cap US Stocks (R 1000) 6.3% B. InternationalStocks (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,

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29 HOW DO YOU DEFINE RISK? 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? 28

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32 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 Asset allocations may be different 31

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34 INVESTMENTS AND ACTUARIAL DISCOUNT RATE Strategy Equity Range Target Equity Allocation TargetLT Return Conservative 25-40% 35% 6% Moderate 45-60% 55% 7% Growth 65-80% 75% 8% 33

35 WHAT SHOULD A TRUSTEE ASK THE ADVISOR? Merits of Active/Passive/Hybrid Risk for Return Long Term Expected Rate of Return (Actuarial Discount Rate) Proper Diversification Funding Policy 34

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39 THANK YOU QUESTIONS? 38