Reducing Personal Risk for ERISA CIOs

CIOs are personally liable for breaches, but there are steps to create more safety.

When we make the rounds in the CIO community, we find that CIOs know that investing plan assets means acting as an ERISA fiduciary and having a duty to act prudently and in the best interests of participants.

What many CIOs may not know, or perhaps would prefer not to think too much about, is that they are personally liable for breaches. Given the stakes, there are actionable steps CIOs should take today to reduce their legal risk.

  1. Stay Current with Your Peers

ERISA may be over 40 years old, but the law is constantly adapting to a changing system and changing best practices in the fiduciary expert community. For example, as defined contribution line-ups evolve and baby boomers face complex draw-down decisions, CIOs are shouldering important decision-making roles. Developments and actions taken by similarly situated peer experts will form the basis for what is prudent and appropriate under ERISA.

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An effective way to stay current is by participating in peer-to-peer webinars and conferences highlighting legal and investment developments, like those offered by CIEBA and other groups. It’s also wise to memorialize attendance at these events to create a record that the CIO is, in fact, staying current on what their fellow experts are doing.

Also, CIOs should consider periodic fiduciary training for their staff. Regular trainings create both a record of diligence and a culture that encourages staff to go back to their desks and review what they do every day.

  1. Know Your Insurance and Indemnification

CIOs need to ensure that they are personally protected from liability claims and the cost to defend such claims. Most CIOs are covered by insurance policies and employer indemnifications, but the coverages can vary. Be sure you understand what is covered and how to use insurance policies. At the very least, know where to find your policy and what circumstances warrant a closer look. 

Similarly, CIOs need to understand whether their employer is providing an indemnity and what that indemnity covers. It is important to confirm that the company agrees to provide independent legal counsel in the event CIOs are personally named in a lawsuit or investigation.  Nine times out of 10, a CIO’s interests are in-line with the employer’s, but in the event they are not, CIOs need protection. 

  1. Document, Document, Document!

CIOs are not required to guarantee successful results, but they must employ a “prudent expert” process (not just a “prudent layman” process). The foundation of a prudent process is an effective governance structure.  CIOs should:

  • Periodically review governing documents (e.g., committee charters and guidelines) to make sure they are consistent and current;
  • Ensure investment committees meet regularly and that members are attending, even via conference call (just ask Enron’s lawyers how stellar member attendance records were when it came time to defend); and
  • Maintain committee decisions by preparing minutes that include rationales, options considered, and relevant expert materials.
  1. Don’t Ignore Warning Signs

The most direct risk for CIOs is the plaintiffs’ bar. Over the past decade, class-action litigation has increased dramatically. For example, there have been at least 80 lawsuits challenging plan fees and settlements ranging to upwards of $62 million.

There are typically warning signs months in advance and staying attentive can give lawyers a leg up when it comes to vigorously defending. Pay attention to announcements in newspapers or company bulletin boards and watch for unusual or overly broad document requests from participants. 

Consider immediately alerting relevant parties (e.g., insurer, corporate counsel) and conducting a review of the plan to proactively identify issues and allow a more effective response. It is also often worth beginning the process of retaining an attorney and consulting with the plan sponsor’s insurer as early as possible.

Dennis Simmons is the Executive Director of the Committee on Investment of Employee Benefit Assets (CIEBA), a trade group comprised of more than 100 of the country’s most experienced ERISA CIOs and fiduciaries.  Michael Kreps is a Principal at the Groom Law Group where he advises retirement plan fiduciaries and service providers.

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Swedish Pension Fund AP6 Returns 12.3% in 2017

Annual return nearly doubles earnings from previous year.

Sweden’s Sixth National Pension Fund, also known as AP6, reported a net profit of SEK3.47 billion ($420 million) in 2017 for a 12.3% return, which was nearly twice the 6.5% the fund earned in 2016. Internal management costs totaled SEK86 million.

“The funds and companies that AP6 has invested in have performed extremely well during the year,” said the fund in a release. “The return on capital employed in these unlisted investments has delivered a record high return of 20.3% for the year.”

Over the last five years, AP6’s annual return on employed capital has been 11.6%, which it said is above the average for the European Private Equity sector.

AP6 was established in 1996 as a closed fund, so there are no inflows or outflows of capital linked to the rest of the Swedish pension system. It is also the only Swedish national pension fund that by law specializes in investments in companies that are not listed on any stock market.

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The results for 2017 are the first full year since the fund completed its portfolio alignment, which had been initiated in 2011. The move was based on a decision by AP6’s board of directors to follow a new investment direction. Holdings that did not conform to the new direction were gradually divested. 

“The return that was generated during the year is a result of conscientious efforts to restructure the portfolio and there has been a high rate of investment over the last five years,” said Karl Swartling, managing director at AP6. “Also in 2017, a steady flow of attractive investment opportunities from both existing and new partners has resulted in several new investments.”

The fund says it makes its own active decisions concerning investments, which means it avoids external management costs or profit sharing. This allows AP6 to lower the average external management cost for the total amount of capital employed via cooperation with a specific fund.

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