April 25, 2019
At the February 2019 meeting of the National Association of Public Pension Attorneys (NAPPA), I had the pleasure of moderating a panel on a topic of perennial interest to many clients: “Governance and Fiduciary Implications of Delegation and the Proper Role of the Board in These Matters.” The Fiduciary and Plan Governance Section panel discussed the design and implementation of delegations to pension fund staff and the proper role of the board. Panelists Lisa Marie Hammond from the California Public Employees’ Retirement System, Ben Brandes from the Wyoming Retirement System, and Julie Becker from Aon Hewitt shared a broad range of pension system perspectives, making it clear that this is not a “one size fits all” exercise. We discussed delegation in the context of all aspects of pension system administration—benefit matters, third-party contracting, investments, securities lawsuits and other litigation, and proxy voting. We gave particular consideration to staff’s accountability to report to the board, including what level of reporting or communication would satisfy the board’s fiduciary duty.
A survey of NAPPA membership was undertaken before the February meeting to guide the discussion. Public funds of all sizes responded, and we reviewed the results to look for trends—whether delegation increased with fund size, for example. (Interestingly, fund size correlated positively with delegation in some areas, such as investment manager selection, but not across the board.)
Because fiduciaries are judged by the decision-making process they undertake, the survey looked at how delegation was typically documented. A clear majority of respondents (62%) indicated that staff delegations were set forth in “policies” of the system. The next-largest number said they relied on “law, rules and regs,” followed by those who said their funds memorialized delegations in “Board minutes.”
From a fiduciary perspective, the question of whether to delegate is tied to trustees’ application of the duty of prudence. As panelists noted, trustees simply cannot be experts on all pension-related subjects, particularly when it comes to sophisticated investments. Thus, delegation is not an abdication of responsibility; on the contrary, boards may even have a duty to delegate depending on the facts and circumstances:
Restatement (Third) of Trusts: A trustee has a duty to personally perform the responsibilities of trustee except as a prudent person might delegate those responsibilities to others. In deciding whether, to whom and in what manner to delegate fiduciary authority in the administration of a trust, and thereafter in supervising agents, the trustee is under a duty to the beneficiaries to exercise fiduciary discretion and to act as a prudent person would act in similar circumstances.
Proper delegation is also related to the application of the duty of care: duty to properly select the delegate, duty to monitor, duty to ensure that the delegate has adequate information and resources, and duty to impose standards of care and loyalty upon the delegate.
From a governance perspective, the panel said delegating may help the board make more effective use of its time, noting that boards should focus on policy, setting direction for their systems, and oversight—not on day-to-day administration..