Fiduciary Responsibility
A fiduciary is one who acts for the benefit of another in a relationship in which the beneficiary may rely on the fiduciary with great confidence and trust, and in which the fiduciary must act with scrupulous good faith, having always in mind the best interest of the beneficiary.
Fiduciary duties and responsibilities extend to all aspects of the retirement system's operation. Fiduciary status is established by a person's actions or responsibilities under the laws, rules and regulations of the system. In general, a fiduciary is a person who:
The fiduciary duties of trustees may be grouped into three categories: loyalty, prudence and care.
Those duties involving the loyalty due the beneficiary by the trustee are greater in a trust than in any other legal relationship. Loyalty in this context means that all actions taken by the trustee with respect to the trust must be in the interest of the beneficiary or member. Specifically, the trustee must act in the sole interest of the beneficiary or member. This means that other considerations, no matter how laudable or important, must not impinge on the decision process.
The trustee must also act in the best interest of the beneficiary or member. For example, faced with two equally safe investments, a trustee is bound to take the one offering the higher return.
Another duty involving loyalty is strict adherence to the purposes of the trust. In the case of public retirement plans, there are two basic purposes: to pay benefits, and to insure that sufficient funds are available to pay those benefits. Therefore, a trustee should ask, with respect to each action undertaken, if that action is in furtherance of one of these purposes of the system.
Interwoven with the duty of loyalty is the concept of honor. A trustee must avoid any form of self-dealing, or dealing with any party in interest to the detriment of the trust. Thus, a trustee may not urge a particular investment because that investment would result, either directly or indirectly, in financial or other gain for the trustee or some third party with whom the trustee has a relationship.
The duty of loyalty, like other fiduciary obligations extends to all aspects of the trust, including its administration. Trustees should keep the beneficiaries informed of matters which affect them, and should adequately protect important or confidential records. Benefits must be paid promptly, and receivables collected timely.
Also with respect to loyalty, there must be no diversion of system funds or assets for any use not in furtherance of the purposes of the system.
The duty under prudence generally relates to actions in the area of investments. Your fiduciary responsibility in the investment area is statutorily provided by LSA-R.S. 11:261. It states that the prudent-man rule shall be applied by the system. It also states that the governing authority of the retirement system shall exercise judgment and care under the circumstances then prevailing that an institutional investor of ordinary prudence, discretion and intelligence exercises in the management of large investments entrusted to it, not in regard to speculation but in regard to the permanent disposition of funds considering probable safety of capital as well as probable income.
This statute provides an external standard of care rather than a personal standard of care. The members of the board of trustees, in dealing with investments and assets of the system, are held to a higher moral and legal obligation than if they were dealing with their own personal property.
There are several important aspects and implications of this standard. First, it is a standard of comparison to institutional investors generally, which means that there must be a certain level of knowledge, experience and expertise. Investment decisions must be reached with care and through the exercise of judgment and diligence. There is a duty to seek out all necessary information. It is important to note the significance of procedure in this regard. The way in which an action is taken may be of more significance than the final result. A comparison of two actual cases may make this clear. In the case of Brock v. Robinson , 830 F.2d 648, an investment was made without input from staff or outside experts. No review was made of outside studies of that type of investment vehicle, nor was it objectively compared with other options. As things turned out, the investment was profitable, but the trustees were nonetheless found to have breached their fiduciary duty for failing to be prudent in the process by which the investment decision was reached.
Contrast that situation with the facts in Donovan v. Walton , 609 F.Supp. 1221, wherein the fiduciaries obtained independent advice. They conducted an intensive, scrupulous investigation which was performed with the highest degree of care. Despite this, the investment was unprofitable. The court refused to hold the trustees liable because it found that they had acted prudently.
Cases have held that the focus is on the individual investment itself, not the performance of the portfolio as a whole.
A prudent approach must also be taken with respect to the selection of investment advisors. Once advisors are selected, there continues to be a duty to monitor their performance, and to exercise judgment and care with respect to their actions and the results thereof.
While it is clear that trustees must base their actions on honest, sound judgment and must avoid being arbitrary, capricious, or impulsive, this alone is not sufficient under the rule. The standard applied is not that of an ordinary person, but on an institutional investor. What if trustees do not have the requisite knowledge, education or expertise? There is a duty to acquire them, usually by hiring persons with that expertise. There is also a duty, however, to undertake to acquire the essential basic education, training and knowledge to permit the effective use and oversight of the hired expertise.
The final broad area of duty is that of care. This is related primarily to the effectuation of the plan and its administration. A board of trustees has a duty to develop, and operate in accordance with, policies, procedures and practices designed to efficiently and correctly administer the System. Once such are established, there continues to be a duty to oversee the administrative activities, but not to disrupt them through inappropriate management activities. Some of the specific duties which fall into this category are to maintain and protect adequate and accurate records, to maintain confidentiality of data where appropriate, and to inform members and retirees of matters affecting them or their System. There is a duty to properly account for all assets, funds and transactions, and to have regular audits. The plan, and the administrative staff, must comply with applicable state and federal laws and regulations. Last, any legal matters affecting the plan must be appropriately prosecuted or defended.
Trustees may be held personally liable for violations of their fiduciary duties and responsibilities for the management of the System and its assets. This liability can result in removal and money damages. Your fiduciary status cannot be delegated away.
The duties of a fiduciary, especially one acting with respect to a public pension fund, are both broad and stringent. It is essential that all fiduciaries of the System know these duties, and constantly act within their mandates.
A fiduciary is one who acts for the benefit of another in a relationship in which the beneficiary may rely on the fiduciary with great confidence and trust, and in which the fiduciary must act with scrupulous good faith, having always in mind the best interest of the beneficiary.
Fiduciary duties and responsibilities extend to all aspects of the retirement system's operation. Fiduciary status is established by a person's actions or responsibilities under the laws, rules and regulations of the system. In general, a fiduciary is a person who:
- Exercises discretionary authority or control over the management of the system, or any authority or control over the management or disposition of the system's assets.
- Renders investment advice to the system for a fee or other direct or indirect compensation, or has the authority or responsibility to do so.
- Has any discretionary authority or responsibility regarding the system's administration, whether or not it is exercised.
The fiduciary duties of trustees may be grouped into three categories: loyalty, prudence and care.
Those duties involving the loyalty due the beneficiary by the trustee are greater in a trust than in any other legal relationship. Loyalty in this context means that all actions taken by the trustee with respect to the trust must be in the interest of the beneficiary or member. Specifically, the trustee must act in the sole interest of the beneficiary or member. This means that other considerations, no matter how laudable or important, must not impinge on the decision process.
The trustee must also act in the best interest of the beneficiary or member. For example, faced with two equally safe investments, a trustee is bound to take the one offering the higher return.
Another duty involving loyalty is strict adherence to the purposes of the trust. In the case of public retirement plans, there are two basic purposes: to pay benefits, and to insure that sufficient funds are available to pay those benefits. Therefore, a trustee should ask, with respect to each action undertaken, if that action is in furtherance of one of these purposes of the system.
Interwoven with the duty of loyalty is the concept of honor. A trustee must avoid any form of self-dealing, or dealing with any party in interest to the detriment of the trust. Thus, a trustee may not urge a particular investment because that investment would result, either directly or indirectly, in financial or other gain for the trustee or some third party with whom the trustee has a relationship.
The duty of loyalty, like other fiduciary obligations extends to all aspects of the trust, including its administration. Trustees should keep the beneficiaries informed of matters which affect them, and should adequately protect important or confidential records. Benefits must be paid promptly, and receivables collected timely.
Also with respect to loyalty, there must be no diversion of system funds or assets for any use not in furtherance of the purposes of the system.
The duty under prudence generally relates to actions in the area of investments. Your fiduciary responsibility in the investment area is statutorily provided by LSA-R.S. 11:261. It states that the prudent-man rule shall be applied by the system. It also states that the governing authority of the retirement system shall exercise judgment and care under the circumstances then prevailing that an institutional investor of ordinary prudence, discretion and intelligence exercises in the management of large investments entrusted to it, not in regard to speculation but in regard to the permanent disposition of funds considering probable safety of capital as well as probable income.
This statute provides an external standard of care rather than a personal standard of care. The members of the board of trustees, in dealing with investments and assets of the system, are held to a higher moral and legal obligation than if they were dealing with their own personal property.
There are several important aspects and implications of this standard. First, it is a standard of comparison to institutional investors generally, which means that there must be a certain level of knowledge, experience and expertise. Investment decisions must be reached with care and through the exercise of judgment and diligence. There is a duty to seek out all necessary information. It is important to note the significance of procedure in this regard. The way in which an action is taken may be of more significance than the final result. A comparison of two actual cases may make this clear. In the case of Brock v. Robinson , 830 F.2d 648, an investment was made without input from staff or outside experts. No review was made of outside studies of that type of investment vehicle, nor was it objectively compared with other options. As things turned out, the investment was profitable, but the trustees were nonetheless found to have breached their fiduciary duty for failing to be prudent in the process by which the investment decision was reached.
Contrast that situation with the facts in Donovan v. Walton , 609 F.Supp. 1221, wherein the fiduciaries obtained independent advice. They conducted an intensive, scrupulous investigation which was performed with the highest degree of care. Despite this, the investment was unprofitable. The court refused to hold the trustees liable because it found that they had acted prudently.
Cases have held that the focus is on the individual investment itself, not the performance of the portfolio as a whole.
A prudent approach must also be taken with respect to the selection of investment advisors. Once advisors are selected, there continues to be a duty to monitor their performance, and to exercise judgment and care with respect to their actions and the results thereof.
While it is clear that trustees must base their actions on honest, sound judgment and must avoid being arbitrary, capricious, or impulsive, this alone is not sufficient under the rule. The standard applied is not that of an ordinary person, but on an institutional investor. What if trustees do not have the requisite knowledge, education or expertise? There is a duty to acquire them, usually by hiring persons with that expertise. There is also a duty, however, to undertake to acquire the essential basic education, training and knowledge to permit the effective use and oversight of the hired expertise.
The final broad area of duty is that of care. This is related primarily to the effectuation of the plan and its administration. A board of trustees has a duty to develop, and operate in accordance with, policies, procedures and practices designed to efficiently and correctly administer the System. Once such are established, there continues to be a duty to oversee the administrative activities, but not to disrupt them through inappropriate management activities. Some of the specific duties which fall into this category are to maintain and protect adequate and accurate records, to maintain confidentiality of data where appropriate, and to inform members and retirees of matters affecting them or their System. There is a duty to properly account for all assets, funds and transactions, and to have regular audits. The plan, and the administrative staff, must comply with applicable state and federal laws and regulations. Last, any legal matters affecting the plan must be appropriately prosecuted or defended.
Trustees may be held personally liable for violations of their fiduciary duties and responsibilities for the management of the System and its assets. This liability can result in removal and money damages. Your fiduciary status cannot be delegated away.
The duties of a fiduciary, especially one acting with respect to a public pension fund, are both broad and stringent. It is essential that all fiduciaries of the System know these duties, and constantly act within their mandates.