Part A – Application and Critical Thinking (30 marks)
Using the information presented in the Forest Workers’ Pension Plan scenario on the next page, answer the following questions. Support your answers with appropriate references to the assigned reading for Unit 5. Each question is worth 10 marks.
The Forest Workers’ Pension Plan
The trustees of the Forest Workers’ Pension Plan meet once per quarter to review the investment performance of their investment manager (ABC Investors). The plan is a defined benefit multi-employer pension plan, and within the industry, it is considered a small plan; it was set up as a spin-off of a larger plan several years ago. Total assets are $14 million.
Three quarters ago, the trustees decided to terminate the services of ABC Investors, and at today’s meeting, they are deciding how they should now proceed. During the course of their meeting, they decided to send out a request for information to four different investment management firms. The trustees debated about which firms to approach, and after some discussion, came up a few possibilities.
Two of the firms are well-known firms in Canada that manage the portfolios of many pension funds. “I hear that they always end up at the top of the lists when consultants perform searches on behalf of other pension funds so I assume that they are good enough for this fund,” one trustee said.
The third firm is a small firm out of Toronto called Star Counsel. Richard, a trustee, is aware that Star Counsel manages some money for two jumbo pension plans, each plan having assets of over $1 billion. “If they are good enough for those larger plans, then they should be good enough to consider for a plan like ours,” he said. The other trustees agreed.
The trustees had wanted to approach four firms, but no one had any further suggestions. One trustee, Pamela, used her laptop to search the Morningstar mutual fund ratings website for names of other fund managers. They looked for the “four star” firms. The group eventually settled on a large, internationally based mutual fund manager who also manages pooled funds for pension clients.
Alexandra, a trustee, said that she would arrange to have these four firms send material and present at the next meeting. She asked, “What specific criteria do we want them to address?”
The group was silent, heads turned to look at each other.
“I don’t know. Where is our SIPP?” asked Pat.
Richard shrugged his shoulders and said, “We haven’t looked at it for a while. Let me dig out a copy and email it to everyone.”
“What did we do when we decided to terminate ABC? I wasn’t at that meeting. Isn’t there a termination process described in the SIPP?” demanded Miriam, another trustee.
“Well, we didn’t actually look at the SIPP,” said Pat. “We just reviewed their standard presentation and didn’t like their performance last year. They didn’t impress us when they came to explain it, and couldn’t really offer any reasonable explanations. We have had them for something like six years now, and we decided, as a group, that it was time for a change. We sent them a letter of termination immediately after the meeting.”
“Whoa… I’m not sure I’m comfortable with some of the things being said and done around this table,” piped up the longest-serving trustee, Anthony.
1) The scenario describes the way in which a board of trustees reached the decision to terminate an external service provider.
a) Summarize the fiduciary duties that apply in this context. Be specific and ensure to fully identify the duty/duties you believe apply.
b) Do you think that the trustees have fulfilled their fiduciary obligation throughout the monitoring and termination process they have pursued so far? Why or why not?
c) What, if anything, do you think the board of trustees should have done differently with regards to the termination of ABC Investors? (15 marks total)
2) The scenario also describes a board of trustees about to engage in the hiring of an external service provider.
a) Summarize the fiduciary duties that apply in this context. Be specific and ensure to fully identify the duty/duties you believe apply.
b) Identify the key factors that the trustees should keep in mind when selecting an appropriate investment manager for the Forest Workers’ Pension Plan.
c) Do you think that the trustees have fulfilled their fiduciary obligation throughout the selection process they have pursued so far? Why or why not? (15 marks total)
Part B – Application and Critical Thinking (30 marks)
Read the Realtors Pension Plan scenario below and answer the questions that follow. Support your answers with appropriate references to the assigned reading for Unit 5.
The Realtors Pension Plan
The pension committee for the Realtors Pension Plan needed to select a defined contribution record keeper for their plan when it was first put in place. The pension committee followed the process outlined in its governance documents to make the selection.
According to this process, service providers were to be selected based on a search process that involved reviewing a lengthy list of candidates provided by an external consultant. This list was then reduced to a short list of potential candidates. The final candidate was selected following a series of presentations, site visits, and an analysis of information obtained from the service provider and the external consultant. The entire search and selection process, including minutes of all committee meetings, was carefully documented.
The selection process was completed two years ago, and Records Inc. was chosen as the record keeper of the defined contribution plan. They performed all the regular tasks such as keeping accounts of member contributions, offering a suite of investment funds for members, transferring member assets between investment options when requested, reporting back to members, etc. For the first three months of service, however, ongoing complaints about errors in record keeping were brought to the attention of human resources (HR) staff, who forwarded them on to the committee. HR staff were invited to attend each of the next quarterly meetings, in which the pension committee asked more questions to determine if progress had been made in resolving the record keeping situation. On each occasion, HR staff reported success or improvement.
One month ago, a plan member attempted to make a transaction and was shocked to learn that her funds had not been allocated according to her prior instructions. Just before a recent market decline, the member had instructed Records Inc. to move most of her funds out of equity investments and into a money market fund. She made this decision because she knew she would need the cash fairly soon, and not because she could predict the market’s downturn. When she went to access her account again, she discovered that all of her funds had remained in the equity investments and, thus, she suffered a significant financial loss.
The member immediately called the HR department to complain. The value of her loss has not yet been estimated, as much will depend on the records produced concerning the value of the specific funds divested and purchased and the dates of instruction. Nevertheless, the member has indicated that she has hired a lawyer to determine if she may seek compensation.
1) Describe the fiduciary duties that apply in this circumstance, where a pension committee is the administrator of a defined contribution pension plan in which members have investment choices, and where those choices are managed by an external recordkeeper. Be specific, and fully identify the duty/duties. (10 marks)
2) The scenario describes a pension committee effectively delegating certain tasks related to the monitoring of an external service provider to the human resources department. In this circumstance, do you think it is appropriate to delegate in this way? Why or why not? (10 marks)
3) Regardless of who the plan member seeks compensation from, the pension committee must determine whether it complied with its fiduciary obligation. In your opinion, did the pension committee breach any duty by continuing with the services of Records Inc.? Why or why not? (5 marks)
4) In this scenario, of the three main parties described—the pension committee (plan sponsor), the recordkeeper, and the plan member—who would you argue has a fiduciary relationship to whom and why? (5 marks)
Part C – Critical Thinking (40 marks)
This part of the assignment asks you to return to the two pension plans you drafted for Crocus Exploration, Inc. in Assignment 2.
Background
Crocus Exploration, Inc. is considering the two plan outlines you submitted to them previously.
The Board would also like your input about how to oversee and govern the plans, including how to involve external consultants, investment managers, actuaries, recordkeepers, etc.
Before they make their final selection, they would like to know more about the governance structure and processes required. They have asked you to prepare a report that clarifies what roles are involved in the plans and what responsibilities each role carries.
Task
Choose one of the plans you designed in Assignment 2 (either the DB or the DC plan). Write a report that explains to the company what is required for the governance of this plan. Your report must include:
1) An organizational chart depicting the governance structure of the plan.
2) An explanation of fiduciary responsibilities that apply to the governance of the plan.
3) A summary of the regulatory requirements concerning governance for this type of plan.