Retirement Plan Fees and Expenses
Separating oversight from operational responsibilities is a hallmark of good governance; but oversight committees can't ignore the devil in the detail, especially when it comes to fees and expenses.
Over the past few years, pension administrators appear to have acknowledged their fiduciary exposures and strengthened their governance frameworks and policies. There has also been better understanding and structuring to manage the inevitable ‘two-hat’ conundrum baked into our North American pension systems which allows employers with a duty to corporate shareholders to also act as plan administrators with a fiduciary duty to plan stakeholders. But there may still be more work to be done to operationalize risk management structures and institutionalize high sounding governance principles and policies.
The recent and appalling story of how a State Street transition manager in the UK deliberately overcharged six of its pension fund clients in the UK by more than £33 million ($55million) ought to serve as a cautionary tale. (see: "'Back up the truck’: How State Street overcharged six clients by £33.2m"). While the story focuses on the bad behaviour of the transition investment manager, there is another story to be told about governance failure.
In this example, it seems incredible that transition management contracts would not have been more specific in terms of authorized charges and disclosure of fees; that plan administration staff would not have followed appropriate procurement and contracting practices, or engaged to obtain a better understanding or awareness; or at the very least that the oversight committee didn’t confirm they had a procurement policy and audit mechanisms in place to ensure that their plans would not be overcharged. This is even more important in a DC context where ‘hidden’ fees and expenses are charged to individual accounts.
It's all fine and good to say, at least in a Canadian context, that the manager, as an agent of the administrator, has the same legal obligations as the administrator to act with honesty and fairness, but it may be the administrator/employers who will bear, if not wear, much of the reputational and possibly even the financial fall-out if they didn’t take the time to ensure they had good policies that required appropriate contracts and audit follow up.
Everyone acknowledges that managing the risk of investment performance is very important, but management of that risk has to include management of the risk of investment cost. In other words, oversight boards need to be assured that there is careful contracting and monitoring taking place at the operational level.
There is a quote attributed to Colin Powell that seems appropriate: “Never neglect details. When everyone's mind is dulled or distracted, the leader must be doubly vigilant.”
Randy Bauslaugh is a partner and national practice leader, pensions, benefits, and executive compensation, at McCarthy Tétrault LLP