Welcome to the Board Room: Fiduciary Education for New Board Members

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Gertrude Cobb
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1 Welcome to the Board Room: Fiduciary Education for New Board Members Peter Mixon Luke Bierman Suzanne Dugan National Conference on Public Employee Retirement Systems 1

2 Introduction Number of Workers 1975: 90 million 2011: 150 million Life Expectancy 1975: Women 75 Men : Women 81 Men 76 Savings Rate 1975: 13% 2011: 5.3% 2

3 Today s Environment Employees Participating in Employer Sponsored Plans 1975: 44 million 2011: 129 million Number of DB Plans 1975: 103, : 45,256 Number of DC Plans 1975: 207, : 638,390 3

4 Today s Environment Pension Plans Face Greater Challenges Today Than Ever: Financial Meltdown of 2008 Continuing Economic Effects of the Great Recession Government Gridlock Scandals Across the Country Underfunded Liabilities Moves to Restructure Plans State and Local Budget Difficulties Blaming of Pension Plans for Budget Woes Demeaning of Unions and Workers 4

5 Crisis in Confidence These challenges are, in part, responsible for: feeding a crisis in public confidence in pension plans placing greater demands on pension plans an increased focus on ethics in pension plans 5

6 Recent Survey of Trustees Amount of hours spent annually by trustees Amount of time necessary to develop a competent trustee Formal orientation, mentoring or knowledge transfer programs for new trustees Top personality trait for good trustees 6

7 What Should Trustees Do in Today s Challenging Environment? Go Back to Basics Focus on Fiduciary Duty There is nothing more fundamental and basic for employee benefit plans than sound and effective attention to fiduciary duty. Training and education is critical to understanding fiduciary duty and applying that understanding in real life situations 7

8 Importance of Fiduciary Training Just because something is basic does not mean it is easy or simple The underlying concept of fiduciary duty is not what we are typically taught Fiduciary duty is not just about a level playing field, or fair dealing, or being honest 8

9 Importance of Fiduciary Training Without education, the principles can easily be misunderstood by well intentioned trustees For example, balancing of interests is not appropriate for trustees, as it would be for other policymakers Trustees are not fiduciaries for appointing authorities, employers that pay into the systems, constituencies, taxpayers, or the public. Trustees owe the same duty to retirees as to someone hired today 9

10 Importance of Fiduciary Training The consequences for a breach of fiduciary duty can be enormous Tax consequences Personal liability of trustees Co fiduciary liability Reputational consequences 10

11 Factors When Considering a Program or Seminar Quality of Faculty Experience and training Quality of Educational Topics Relevant Up to date, Different levels for beginning, intermediate and advance trustees Sponsoring Organization Reputation, Mission, Specialty 11

12 Educational Policy Why have a trustee educational policy Demonstrate commitment To members and beneficiaries To DOL and other regulators To the public (crisis in confidence) What the policy should cover: Who is covered Frequency Minimum requirements/conditions Reasonableness Approved Programs 12

13 Fiduciary Standard What is the fiduciary standard, and what does it mean? A fiduciary is a person having a duty, created by his or her undertaking, to act primarily for the benefit of another in matters connected with the undertaking. 13

14 Basic Fiduciary Principles Exclusive Benefit Rule Duty of Loyalty Avoidance of Conflicts of Interest Prohibited Transactions/ Self Dealing Impartiality Duty of Prudence Duty of Care Diversification Delegation Follow Plan Documents 14

15 Application of Fiduciary Principles Process, Process, Process Documentation of Process is Key: Under ERISA and common law, a fiduciary is not judged by the results of decisions, but rather by the process undertaken to reach such decisions The duty of prudence requires a standard of conduct, not outcome or performance. 15

16 Pension Plan Triangle Trustees National Conference on Public Employee Retirement Systems Fiduciary Duties Pension Plan Statutory Duties Members Vested Rights Employers klgates.com 16

17 Case Study Hypothetical: Metropolitan Pension Fund 17

18 Conclusion Fiduciary Training & Education Best Practices 18

19 Conclusion Culture 19

20 Contact Information: Peter Mixon K & L Gates LLP peter.mixon@klgates.com Suzanne M. Dugan Cohen Milstein Sellers & Toll, PLLC sdugan@cohenmilstein.com Luke Bierman lbierman@cohenmilstein.com

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