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Fiduciary Outsourcing Considerations

Posted by Susan Mangiero on March 04, 2015

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Plan Sponsor contributor, Judy Ward, takes a hard look at what many believe is a growing trend to outsource certain activities by retirement plan fiduciaries. A central theme in Fiduciary Outsourcing Options (February 2015) is that buyer and seller must be clear about the scope of work and document the agreement accordingly. This conversation importantly starts with a decision by a plan sponsor as to what fiduciary duties it seeks to delegate to consultants, asset managers and other types of advisors (to the extent legally allowable). By extension, this means that a plan sponsor should take inventory of resident skills, how much it can afford to spend on full-time employees versus contractors and whether there is a comfort level to perform certain tasks on its own. Notable quotes from Fiduciary Outsourcing Options include the following:

• Searching for an outside fiduciary ‘is an exercise in risk management. A sponsor should consider many factors about a fiduciary outsourcer’s capabilities. (Dr. Susan Mangiero )
• An outsourcing provider should welcome a sponsor’s questions and lend support for its thorough due-diligence selection process. the sponsor and outsourcer should discuss how their communications would work once the relationship starts. (Attorney Kim Shaw Elliott )
• Not all companies promoting themselves as outsourced fiduciaries have the same ability to meet those responsibilities. You really have to look at their experience. (Attorney Ary Rosenbaum )
• There can be a disconnect between what the outsourcer promoted that it will do and what the contract actually says the outsourcer will do. (Mr. Ronald Hagan )
• Being a fiduciary means you need to have a prudent process. You have to have a basis and a rationalization for making the decision. (Attorney David Levine)
• If a plan sponsor thinks that certain activities are going to be done by a fiduciary adviser, but the fiduciary adviser does not believe they are obliged to do such work, there is an expectations gap. (Dr. Susan Mangiero )

Based on my experience, there are a lot of ways to get things wrong. My view is that the Request For Proposal (RFP) process to select an outsourced fiduciary entails education and feedback from ERISA (or public pension plan) counsel, prior to signing on the dotted line. Understanding that there are different kinds of fiduciaries is one aspect. Plan sponsor decision-makers are charged with monitoring delegates. This means that buyers must have a good sense as to how to best benchmark a service provider, once hired.

Nuts and bolts of contracting are addressed in Expert Q&A on Outsourcing Fiduciary Investment Responsibilities (Practical Law. February 2014) by Attorney David Levine and Attorney Allison Tumilty. Also check out Outsourcing Employee Benefit Plan Services (ERISA Advisory Council, 2014). Note the recommendations that the U.S. Department of Labor: (A) educate plan sponsors on current practices with respect to outsourced services; (B) clarify the legal framework under ERISA for delegating responsibility to service providers; (C) provide additional guidance on the duty to select and monitor service providers; (D) facilitate the use of multiple employer plans and similar arrangements as a means of encouraging plan formation and easing administration burdens: and (E) update and provide additional guidance on insurance coverage and ERISA bonding of outsourced service providers.

Service providers have a golden opportunity to stand up and deliver help to prospective and existing retirement plan clients as they explore the use of outsourced fiduciaries. Building and maintaining a fiduciary outsourcing relationship can be complex and the professional liability is real. It is important to exercise care at the beginning and thereafter.

ERISA Litigation Conference Addresses Timely Fiduciary Issues

Posted by Susan Mangiero on March 01, 2015

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Dr. Susan Mangiero announces the sponsorship of a forthcoming conference about ERISA litigation and regulatory issues by Fiduciary Leadership. LLC. Produced by the American Conference Institute (ACI), this mid-April event pairs attorneys (including corporate counsel) with jurists to address timely topics that include, but are not limited to, the following:

• Excessive fees;
• Church plan lawsuits;
• Fiduciary liability insurance;
• Use of independent fiduciaries;
• Enforcement risk;
• Ethics;
• Employee Stock Ownership Plan (ESOP) litigation;
• Proceedings related to company stock in ERISA plans; and
• Health care mandates and related compliance.

www.americanconference.com/ERISA .

I look forward to seeing you in the Windy City in a few weeks. With the just announced push by the White House for fiduciary conflict of interest rules, U.S. Supreme Court activity in Tibble v. Edison International and news of multi-million ERISA litigation settlements, this conference is expected to be informative and important.

QPAM Exemptions For Money Managers Being Evaluated

Posted by Susan Mangiero on January 28, 2015

For those who missed Financial Firms as ERISA Plan Sponsors: The When, What and How of the QPAM Audit Requirement on May 1, 2013, click to learn more about the Qualified Plan Asset Manager exemption and what it means to asset managers. Slides from this webinar — featuring ERISA attorney Howard Pianko (Seyfarth Shaw LLP), ERISA attorney Mary Alcock (Clearly Gottlieb Steen & Hamilton LLP) and Dr. Susan Mangiero (Fiduciary Leadership, LLC) — can be helpful to anyone seeking to stay abreast of current news about QPAM status scrutiny.

In DOL feeling heat on QPAM exemptions (January 26, 2015), Pensions & Investments reporter Hazel Bradford explains that the U.S. Department of Labor is under increasing pressure to get tough on money managers with U.S. retirement plan clients when their firm, or an affiliate, gets into legal trouble. Far from being a theoretical construct, Credit Suisse Asset Management stands to lose revenue if it cannot maintain its QPAM status for more than $2 billion of ERISA assets. A November 14, 2014 DOL press release announced a January 15, 2015 hearing about whether a temporary grant of QPAM status should be revoked or made permanent after Credit Suisse’s guilty plea to one count of conspiracy to engage in tax fraud. See Testimony to be heard on the status of related firms and affiliates as Qualified Professional Asset Managers .

Ahead of the meeting, a letter was sent to the DOL on U.S. House of Representatives, Committee on Financial Services letterhead, urging this retirement plan regulator to consider adding a prospective employee restriction banning Credit Suisse QPAMs from hiring any employees who have been or who subsequently may be identified by Credit Suisse or any U.S. or non-U.S. regulatory or enforcement agencies as having been responsible for the criminal conduct in any capacity. Click here to read the full letter. Wall Street Journal reporter John Letzing writes that a bank spokesperson describes the issues as having occurred in the distant past and has worked hard to uphold the highest standards in the industry, and where we have fallen short, we have accepted responsibility and have addressed the issues. See Credit Suisse’s ‘Too Big to Bar’ Hearing Slated for Tomorrow (January 14, 2015). In granting a temporary waiver a few months ago, the DOL expressed a desire to avert possible disruptions in retirement plan investments that would be detrimental to the financial well-being of individuals saving for retirement, or pensions.

In my experience as someone who has co-created a QPAM audit product, some asset managers seem to have taken the path of most resistance and quickly shut down discussions as a way to avoid someone taking a close look at practices. Others with whom I have spoken about the QPAM audit are focused on full compliance. Given the variability in QPAM awareness, it might be extremely helpful to have QPAM audit results made public. Not only could ERISA plan participants review the results but investment fiduciaries could examine the audit reports as part of their due diligence, both prior to hiring an asset manager and then regularly thereafter.

Whatever happens, most people seem to agree that the QPAM exemption-granting process is important but complex. As a senior legal ERISA professional, Howard Pianko has it right when it says that The DOL is facing a difficult decision.

Investment Compliance and A Broken Clock

Posted by Susan Mangiero on December 13, 2014

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A few days ago, a broken clock atop a local row of shops caught my eye. It wasn’t so much that the clock showed the wrong time but that someone had added decorative holiday bows at its base. This means that the individual had to have seen that something was wrong but looked the other way. The clock remains frozen at 10:15 with jolly ribbons of red and green but no utility for those seeking help from its hands. Whether the error was due to benign neglect or malevolent design is unknown to the passerbys. What is obvious is that someone did not care enough to put things right.

In my line of work as a forensic economist, the attorneys remind me that intention counts from a legal perspective. Whether as part of a litigation or enforcement, questions are frequently asked about the effectiveness of risk management policies and procedures and the extent to which company executives or asset managers followed them. For some types of cases such as ERISA matters, the procedural prudence concept is often a cornerstone of my expert analysis as to what took place versus what should have taken place (assuming that deficiencies exist).

Based on December 11, 2014 comments by U.S. Securities and Exchange Commission (SEC) Chair, Mary Jo White, process will continue to get a hearty review by investment management regulators. Her speech, entitled Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry lays out 2015 priorities for the more than $63 trillion of assets under management. These include conflicts of interest controls, protocols for enhanced transparency about mutual fund fees and risks and a third area described as controls on portfolio composition risks and operational risks. Chair White further details focus areas such as liquidity, leverage, use of derivatives, custody safeguards, internal systems integrity and access to data that can be readily compared across funds with sufficient granularity. She adds that the SEC is considering ways to implement the new requirements for annual stress testing by large investment advisers and large funds, as required by the Dodd-Frank Act.

Carrying out a plan to improve each and every one of these items requires an ongoing process and, by extension, an intent of the actors to make a positive difference. For example, measuring liquidity (which is a precursor to managing such) or assessing the viability of a given securities lending infrastructure begins with a set of objectives and necessarily evolves into an integrated array of rules (hopefully one that is disciplined and appropriate for the given facts and circumstances).

The merits of fixing the proverbial clock or more literally, having an excellent risk governance process in place, are plenty. Solid customer retention and lower long-term costs (by thwarting expensive mishaps) are two good motivators.

Automated Investment Management and Fiduciary Liability

Posted by Susan Mangiero on August 24, 2014

As I read about the pros and cons of providing automated investment advice, I am reminded of one of my former financial modeling students. Knee deep in math and not very happy about the hard work ahead, he felt strongly that hiring someone else to do the grunt work would leave him free to tackle more exciting managerial pursuits. My counter that supervisors still need to know the fundamentals was not met with alacrity. Too bad for him and others who eschew the reality that what goes in the model is going to impact what comes out.

Regulatory obligations to clients are binding. Setting up an algorithm and then expecting things to run smoothly on autopilot could fast lead to disappointment. On the other hand, those organizations that create a quality process that gets regularly tested for suitability, technology integrity and changing market conditions may succeed big. Certainly the topic of fees is one that continues to surface as a hot button issue. Money columnist Ron Lieber describes firms like Betterment, FutureAdvisor and Wealthfront as ones to watch, asking So how much longer can the more established players really expect to charge two to four times more than the upstarts for their help? However, he acknowledges that Being able to talk to a human being face to face still matters to many people and that brand name recognition is another strength that established brick and mortar firms possess. See An Emerging Price War in the World of Investment Advice (New York Times. August 22, 2014).

According to Can an algorithm be a fiduciary? by Suzanne Barlyn (Reuters. August 14, 2014), robo-advisors that deliver advice via the Internet are regulated just like independent advisers who set up offices and meet clients on a regular basis. A visit to the website for Wealthfront Inc. reveals that the firm is an SEC-registered investment adviser. Dr. Burton Malkiel of A Random Walk Down Wall Street fame is listed as the Chief Investment Officer with luminaries such as behavioral economist Meir Statman showcased as an advisor. The Investors page states that they have raised in excess of $65 million from venture capitalists and prominent angels. Its president and CEO, Adam Nash. has experience with Linkedin, eBay and Apple. Betterment LLC is likewise listed as an SEC registered investment advisor with money in the bank. According to Investment News reporter Joyce Hanson, Northwestern Mutual Capital and Citigroup Inc.’s venture capital arm were part of a $32 million Series C funding round, closing only a few years after the company began in 2010. See Online rivals Betterment, LearnVest rake in $60 million of venture funding (April 15, 2014).

Given the regulatory expectation of changing fiduciary standards, the independent fee-only business model is being challenged on multiple fronts. That does not mean that opportunities are wanting. Some posit that these new and well-capitalized financial planning entrants appeal mainly to the younger generation, with gray-haired investors wanting a direct encounter. Lucrative niche areas such as estate planning do not easily lend themselves to being delivered via computer. Others believe that if you can’t beat them, join them in the digital world. Investment News writer Mason Brasell quotes the CEO of Charles Schwab Corporation, Walt Bettinger, as saying that We are fast at work on what we believe will be a groundbreaking and market impacting introduction of an online advisory solution. See Schwab preps robo offering (July 25, 2014). Charles Paikert writes in Robo Advisor Update. Schwab Plans Affect RIAs, Startups (Financial Planning, July 31, 2014) that start-ups in this field could be acquired by firms that have the ability to combine technology with a robust traditional distribution system.

My take, based on experience as a modeler and forensic economist, is that prospective clients need to do their homework about the company and product being considered, regardless of the delivery mechanism. From a governance perspective, I would be leery of relying on a black box solution without some knowledge of what safeguards are in place with respect to the creation, revision and ongoing monitoring of investment selection algorithms. As I wrote in Asset Valuation: Not a Trivial Pursuit by Dr. Susan Mangiero (FSA Times, Institute of Internal Auditors, Q1-2004), there are at least ten things that need to be done as part of mitigating model risk. One key task is to assess the conditions under which a model will implode or, worse yet, generate wholly inappropriate predictions that in turn are used to give bad recommendations. Understanding data issues and knowing what internal controls exist with respect to who is authorized to tinker with a model are other salient must know items. Email contact@fiduciaryleadership.com if you want a copy of the article.

Yet another issue to address is the proprietary nature of some algorithms. On August 8, 2014, a lawsuit was filed by attorneys for GRQ Investment Management, LLC against Financial Engines, Inc. and Financial Engines Advisors LLC. The complaint alleges patent infringement of several investment-related methods. In an August 11, 2014 memo on the topic of computer-generated advice, Dechert ERISA attorneys Andrew Oringer and Susan Camillo reference U.S. Department of Labor Advisory Opinion 2001-09A as an authority to allow providers to offer qualified computer-generated investment advice to plan sponsors and then in turn offer the advice to plan participants and beneficiaries. They explain that the U.S. Congress in 2006 formalized this statutory exemption as long as certain conditions were met by the provider.

At this juncture, what is clear is that the financial advisory industry is changing. What is less certain is how these changes will manifest themselves in the form of individual and institutional investor advantages and trouble zones, respectively. Uncertainty about the legal ownership and financial integrity of a computer-driven model is one factor. Another issue is the extent to which such advice can protect clients against being steered towards unsuitable investments. Not yet known is whether only certain types of investors will want a hands-off approach once preliminaries are done, such as the completion of a questionnaire about risk and return. Roll-ups of stand alone digital start-ups could change the financial planning landscape even further, thereby impacting competitiveness, fees and economies of scale.

Although Greek philosopher Heraclitus lived hundreds of years ago, his observation that The only thing that is constant is change could not be more apt.

ACI ERISA Litigation Conference — New York City

Posted by Susan Mangiero on July 03, 2014

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I have the pleasure of announcing that Fiduciary Leadership, LLC is one of the sponsors of this recurring educational conference. For a limited time only, I am told that interested parties can register early and receive a discount. Contact Mr. Joseph Gallagher at 212-352-3220, extension 5511, for details.

Besides two full days of interesting and timely presentations, the American Conference Institute conference about ERISA litigation gives attendees a chance to hear different perspectives. Scheduled speakers include investment experts, corporate counsel, defense litigators, plaintiffs’ counsel, class action specialists, judges and fiduciary liability insurance executives, respectively.

Click to download the ACI ERISA Litigation Conference agenda or take a peek at the list of topics as shown below:

• Fifth Third v. Dudenhoeffer and the Impact of the Decision on the Future of Stock Drop Case and Litigation Regarding Plan Investments;
• ERISA Class Actions Post-Dukes and Comcast: Standing, Commonality, Releases and Arbitration Agreements, Monetary Classes, Issue Certification, Certification of Class Of Plans, Class Action Experts and Halliburton, and More;
• The Affordable Care Act, Health Care Reform and New Claims and Defenses in Workforce Realignment Litigation;
• 401(k) Fee Cases: Current Litigation Landscape and Recent Decisions, Evolving Defense Strategies, DOL Enforcement Initiatives, Impact of Tussey and Tibble, Excessive Fund Fees, and More;
• Retiree Health and Welfare Benefits: M&G Polymers USA, LLC v. Tackett and the Yard-Man Presumption;
• Multiemployer Pension Plan Withdrawal Liability;
• Independent Fiduciaries: Working with Them to Manage Plan Assets, Handle Administrative Functions and Authorize Transactions; and the Latest Claims Involving Failure to Monitor Independent Fiduciaries and/or Keep Them Informed;
• ESOP: New and Emerging Trends in Private Company ESOP Litigation, Lessons Learned from Recent Decisions in ESOP Cases, and the Latest on DOL Investigations and Enforcement Priorities;
• Benefit Claims Litigation: the Latest on ERISA-Specific Case Tracks Aimed at Discovery Disputes, Attorney Fees Post-Hardt, Limitation Periods in Plans, Addressing Requests for Evidence Outside of the Record in Conflict Situations, Judicial Review of Claims Decisions and the Battle Over Discretion, and More;
• Fiduciary Liability Insurance: Assessing Current Coverage and Future Needs & Strategic Litigation and Settlement Considerations;
• New Trends in Church Plan Litigation;
• New Trends in Top Hat Plans: The Latest Litigation Risks;
• Public Pension Developments and Trends; and
• Ethical Issues That Arise in ERISA Litigation: The Fiduciary Exception to Attorney-Client Privilege, the Question of Who Really Is Your Client.

In April of this year, I presented at the ACI ERISA Litigation conference in Chicago about working effectively with an economic and/or fiduciary expert. Click to access the slides entitled Expert Coordination: Working With Financial and Fiduciary Experts by Attorney Joseph M. Callow, Jr. (Keating Muething & Klekamp PLL), Attorney Ronald S. Kravitz (Shepherd, Finkelman, Miller & Shah, LLP) and Dr. Susan Mangiero (Fiduciary Leadership, LLC). For a recap of this session, click to read ERISA Litigation and Use of Economic and Fiduciary Experts (May 5, 2014).

On October 28, 2014, I will be part of a panel about public pension fund issues. I will be joined by Attorney Elaine C. Greenberg (Orrick, Herrington & Sutcliffe LLP) and Attorney H. Douglas Hinson (Alston & Bird LLP). Topics we plan to cover are shown below:

• Overview of Public Pension Market — Scope, Size and Funding Levels;
• Government Plan Hot Button Issues;
• Pension Reform:
• Pension Obligations and Bankruptcy, With Discussion of Detroit;
• SEC Enforcement Actions, With Discussion About the State of Illinois;
• New Accounting and Financial Reporting Standards;
• Use of Derivatives by Municipal Pension Plans;
• Fiduciary Breaches as They Relate to Due Diligence; and
• Suggestions for Risk Mitigation and Best Practices.

I hope to see you in the Big Apple in a few months!

ERISA Pension Plan Investing in Hedge Funds and Private Equity Funds

Posted by Susan Mangiero on March 25, 2014

ERISA Pension Plans: Mitigating Liability Risks for Hedge and Private Equity Fund Alternative Investments

Posted by Susan Mangiero on March 17, 2014

I have the pleasure of being part of an April 17, 2014 program for Strafford’s continuing legal education offerings for and about ERISA plans. As a courtesy, I can invite up to ten (10) professionals as my guest. If you are interested, send an email to contact@fiduciaryleadership.com with your name, email address, title and company affiliation. See below for further information about this exciting program or click here to learn more.

This CLE webinar will provide ERISA and asset management counsel with a review of effective due diligence practices for institutional investors. The panel will offer best practices to mitigate government scrutiny and suits by plan participants.

Description

The DOL’s and SEC’s new disclosure rules and heightened attention on compliance and valuation mean corporate pension plans are subject to new scrutiny. Plans that invest in alternatives must focus on properly vetting asset managers more than everor risk claims of poor governance and excessive risk-taking.

Advisors to hedge funds and other private funds have been impacted by new regulations in the past few years. Understanding asset managers’ obligations is essential to any retirement funds with limited partnership interests.

In addition, suits and enforcement actions against asset managers are on the rise. Counsel to hedge fund and private equity fund managers must fully grasp and guide clients on full compliance with the duties of ERISA fiduciaries to plan participants.

Listen as our ERISA-experienced panel of benefits counsel and professionals provides a guide to the legal and investment landmines that can destroy portfolio values and expose institutional investors and fund managers to liability risks. The panel will review new ERISA considerations for 2014 following recent regulatory changes and outline best practices for implementing effective due diligence procedures.

Outline

1. ERISA fiduciary duties for institutional investors

1. Hedge funds and private equity funds compared to traditional investments Regulatory developments

1. Disclosure
2. Compliance Valuation

Benefits

The panel will review these and other key questions: