NAFCU Services Blog

Guest post by Tom McLaughlin, Regional Director, Pentegra Retirement Services

As the CEO of a credit union, you engage in many different activities that raise the potential for legal liability. In most cases, these are risks borne by the credit union, i.e., any legal issues will be addressed by your legal counsel and/or covered by any one of several insurance policies.

But there is one area that is different, and may pose personal liability for you – your role as the fiduciary for your credit union’s retirement plan. If something goes wrong, you are personally responsible – that means all of your assets (savings, retirement, children’s college fund, vacation home, etc) are at risk. But it doesn’t have to be that way.

The essence of your credit union’s retirement plan, whether it is a 401(k) plan, profit sharing plan or defined benefit pension plan, is the plan trust—designed to ensure future benefits for employees participating in the plan and their beneficiaries. The Employee Retirement Income and Security Act (“ERISA”), established 1n 1974, created a standard of conduct that includes loyalty, due care and prudence.

Management of a retirement trust is rarely the sole responsibility of one individual—it is typically shared among a number of people that have other responsibilities in an organization. To add to the confusion, there are many different definitions, interpretations and rules regarding fiduciary responsibilities, and those that serve in a fiduciary capacity are often confused as to what they should be doing. Fostering a culture of fiduciary responsibility is critical to helping people entrusted with performing these critical duties and responsibilities, and minimizing liability for you, your credit union and your Board.

Where do you start?

It all comes down to process. A fiduciary must have a framework for the process of managing the retirement plan trust that satisfies the standard of conduct specified by ERISA.

Step 1: Organize

The process begins with fiduciaries educating themselves on the laws and rules that will apply to their situations. For example, fiduciaries of retirement plans need to understand that ERISA is the primary legislation that governs their actions. Once fiduciaries familiarize themselves with their governing rules, they then need to define the roles and responsibilities of all parties involved in the process.

Step 2: Formalize

Formalizing the process begins with creating the retirement plan trust’s goals and objectives. Fiduciaries should identify factors such as investment goals as well as an acceptable level of risk and expected return. By identifying these factors, fiduciaries create the framework for evaluating investment options.

These steps should then be outlined in a written investment policy statement, which provides the necessary detail to implement a specific investment strategy.

Step 3: Implement

A due diligence process must be designed to evaluate potential investments. The due diligence process should identify criteria used to evaluate and filter through the pool of potential investment options. The implementation phase is usually performed with the assistance of an investment advisor because many fiduciaries lack the skill and/or resources to perform this step. When an advisor is used to assist in the implementation phase, fiduciaries and advisors must communicate to ensure that an agreed upon due diligence process is being used in the selection of investments or managers.

Step 4: Monitor

The final step can be the most time consuming and also the most neglected part of the process. Often fiduciaries pay less attention to ongoing monitoring—particularly when they get through the first three steps correctly. However, fiduciaries cannot neglect any of their responsibilities, because they could be equally liable for negligence in each step. Creating a culture of fiduciary responsibility is critical for success in this final step. Much like safety programs in hospitals or manufacturing environments, a well established culture of safety helps people always ask the question, “Is this the right thing to do?”

Creating the culture

While the steps listed above establish the building blocks of a fiduciary process, in the absence of a culture of critical thinking, the process can become hollow. Simply going through the motions can lead to a plan with high costs and poor performance. ^[1] If you, as a leader, start by examining your own process and adopt the prudent practices listed above, you can help cultivate a culture of fiduciary responsibility. To further cement this culture, you will need to ensure that new ways of asking questions, running meetings and conducting investment reviews become your committee’s new routine. Through proper execution of the prudent process outlined in these four steps, trustees and investment committee members can reduce their potential liability by being confident that they are fulfilling their fiduciary responsibilities. Fiduciaries should embrace their responsibilities and understand that they will be judged not on the returns of their portfolio, but on the processes and prudence employed in the creation of the returns.

An alternative approach

If all this sounds like a challenge, that’s because it is – changing and implementing an approach that has essentially zero-tolerance for errors is difficult. But there is another way.

A multiple employer plan groups retirement programs of different organizations together all under one umbrella, with one person or entity named as the principal plan fiduciary for all of them – in essence, transferring the legal liability from any individual CEO to the fiduciary of the multiple employer plan. As an added benefit, multiple employer plans also offer substantial administrative savings with regard to things like audits, filing and reporting.

Let me sneak in a modest plug -- Pentegra offers just such a plan to credit unions. As an independent, not-for-profit cooperative, Pentegra manages over 1,200 retirement plans and more than $6.5 billion in retirement plan assets for community-based financial institutions nationwide.  I’d respectfully suggest that it is something any credit union CEO should consider – after all, why take on additional liability that you don’t really need?

Want to talk more? Post your comments on the NAFCU Services Blog or shoot me an email at tmclaughlin@pentegra.com.

^[1] The Different Flavors of ERISA Fiduciaries, Redux, W. Scott Simon | 03-04-10