Managing Fiduciary Risk Insulating Investment Committees from Potential Liability

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1 Managing Fiduciary Risk Insulating Investment Committees from Potential Liability Presented By: Bruce C. Fernandez, CFA InvestingByNumbers, LLC

2 Do You Know What it means to act with the care, skill, prudence, and diligence of a prudent man under ERISA? Delegating responsibility to someone else is a fiduciary action and subject to the prudent man standard of care? ERISA requires review and oversight of delegates performance on a regular basis? Liability may not be determined by outcomes, but on whether prudent investment practices were followed? Having a process, documenting that the process was followed, and regular oversight is key in insulating yourself from future fiduciary liability 2

3 The Prudent Man Standard of Care a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims by diversifying the investments of the plan so as to minimize the risk of large losses in accordance with the documents and instruments governing the plan 3

4 Care, Skill, Prudence, and Diligence The Prudent Man standard is behavior-oriented rather than outcome-based The focus is on how diligently actions are performed To act as a prudent investor means decisions were properly and thoroughly considered and that a reasonable determination was made at the time the action was taken that it was consistent with the investment program s objectives Prudence is demonstrated principally by the process followed when making decisions 4

5 PROCESS DOCUMENT OVERSIGHT Three Pillars of Prudence InvestingByNumbers Three Pillars of Prudence : THREE PILLARS of PRUDENCE Make decisions using a Prudent PROCESS DOCUMENT actions to show the process was followed Perform OVERSIGHT at reasonable intervals 5

6 Use Prudent Process ERISA requires use of a prudent process -- the focus is on the conduct of the fiduciary at time of time of the investment decision Understand and apply prevailing investment industry practices Exercise diligence in obtaining information, then use it to make reasonable investment decisions Adopt policies and procedures to assure consistency 6

7 Document Actions Documentation is the cornerstone of demonstrating the existence of a prudent process Investment committee meeting minutes provide the opportunity to show a process was followed when in making investment decisions Must be able to show that a decision was properly and thoroughly considered and that it was reasonably determined at the time to be in the best interests of the plan participants and beneficiaries 7

8 Perform Oversight Delegating responsibility to someone else, whether for investments or other services, is a fiduciary action and subject to the prudent man standard of care. An appointing fiduciary is obligated to prudently select and monitor the performance of their appointees The performance of the appointed fiduciaries should be reviewed by the appointing fiduciary at reasonable intervals to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan 8

9 Manage Fiduciary Liability Insulate Yourself by Following the Three Pillars of Prudence Make decisions using a prudent PROCESS Whether ERISA s standard of prudence has been breached often depends on whether the fiduciary can demonstrate that it engaged in procedural due diligence before taking the action under question DOCUMENT actions to show the process was followed Proper documentation serves as the foundation of sound fiduciary governance and provides the basis for defending actions taken against future liability Perform OVERSIGHT at reasonable intervals A common strategy is to use a failure to monitor as a basis for liability lawsuit 9

10 Practical Suggestions Be familiar with plan documents Adopt procedures to assure consistency Develop and follow written IPS Meet on a regular basis Keep good minutes/accurate records Confirm compliance with IPS Document all decisions Avoid conflicts Conduct investment education Retain capable experts; follow their advice Schedule a HealthCheck SM review 10

11 InvestingByNumbers HealthCheck SM HealthCheck SM Validates things are being done the right way Provides a comprehensive assessment of your existing investment program with a summary report showing overall compliance with industry best practices Is an easy way to ensure your investment program is sound and you are fulfilling your fiduciary responsibilities 11

12 Time for a HealthCheck SM? Features Conduct study of existing investment program Practical application of investment standards Recommend actions compliant with industry norms Serve as independent, objective subject matter expert Benefits Repeatable investment process Better investment decisions Successful outcomes Insulation from potential future liability 12

13 HealthCheck SM Deliverables Provides a comprehensive assessment of your existing investment program Features a dashboard style summary report showing overall compliance with industry best practices Identifies high priority issues and can be used as a roadmap to address any areas of concern Establishes the foundation of a sound investment program 13

14 HealthCheck SM Summary HealthCheck SM is a comprehensive assessment that: Validates things are being done the right way Demonstrates a proactive review process Finds deficiencies before problems develop Provides a roadmap to resolve areas of concern HealthCheck SM is an easy way to ensure an investment program is sound and you are fulfilling your responsibilities 14

15 Experience, Expertise, Independence As an investment practitioner for almost 30 years, Bruce Fernandez has a deep appreciation and understanding of the investment decision-making process and the importance of having a sound, well-managed investment program. He draws from his experience as an industry insider and brings with him a broad knowledge of the financial services industry, its products, and its services. Fernandez served for over twenty years in a number of capacities for A.G. Edwards and its affiliates, including Chief Investment Officer for A.G. Edwards Trust Company, FSB. Most recently he was a Managing Director with Scout Investments. He began his career with General American Life Insurance Company. A CFA charterholder, Fernandez is on the Board of the CFA Society of St. Louis and has served on several Investment Company Institute committees including Money Market Funds, Fixed Income and Municipal Securities Advisory. Fernandez earned both his BSBA and MBA from Washington University. 15

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