Monday, October 19th, 1987 is known as “Black Monday” with a downturn in the DJIA of – 22.6% or 508 points. If/when it happens in 2018/19, the equivalent loss in the DJIA would 5,875 points in one day! The near collapse of the global capital markets in 2007 was almost as severe.
The length of the current bull market is unprecedented. The thousands of different types of derivative instruments propping up the valuations are almost incalculable and are far more complex with the inclusion of emerging market offerings. The probabilities of a major market disruption continue to rise almost daily. Perhaps a Black Swan may be boarding the next flight to New York. So, what role do trustees have in this and how can they protect their constituents?
One way to mitigate the impact of a market downturn is to monitor the risks of the pension investments and their advisors. In 2015, the US Supreme Court, in their comments about the Tibble v Edison case, held that:
“…because a fiduciary normally has a continuing duty to monitor investments and remove imprudent ones, a plaintiff may allege that a fiduciary breached a duty of prudence by failing to properly monitor investments and remove imprudent ones. Such a claim is timely as long it is filed within six years of the alleged breach of continuous duty.” (source)
The key to the case was the requirement that Trustees and individual members of Boards of Directors who have responsibility for their company’s pension funds must continuously monitor the investments.
Identifying and managing fiduciary liability can be difficult. Companies with many subsidiaries may have multiple retirement plans spread across a variety of jurisdictions, all with their own unique requirements. Fortunately, there is a common standard against which to monitor their fiduciary process. Fi360 and the Centre for Fiduciary Excellence (CEFEX) developed a set of 21 best practices (also known as the Global Fiduciary Standards) based on the ISO 9000 Quality Management Standard. Organizations which meet the global standards are certified by CEFEX. Being certified greatly reduces the risk of fiduciary liability.
In the Tibble case, the question of a failure to properly monitor their investments would not have occurred if Tibble had been able to demonstrate that their conduct was in conformance with the best practices. For example, Practice 4.1 requires “Periodic reports compare investment performance to appropriate index, peer group, and investment policy statement objectives”
Details of Practice 4.1 are laid out in the following three criteria:
* 4.1.1 The performance of each investment option is periodically compared against an appropriate index, peer group, and any other performance-related due diligence criteria defined in the investment policy statement.
* 4.1.2 “Watchlist” procedures for underperforming Investment Managers are documented and consistently applied.
* 4.1.3 Rebalancing procedures are reasonable, documented, and consistently applied
Practice 4.1 is one of the 21 Prudent Practices developed by Fi360 in the early 1990’s. Underlying the Practices are 82 criteria.
Had the trustees of the Edison 401(k) Plan been in conformance with the standard, perhaps they would have not lost the suit.