February 28, 2025
The start of a new year often brings change and fresh opportunities, and the world of public pensions is no exception.
For some pension plans, the new year may signal the appointment of new trustees to their boards. It’s essential for new trustees to educate themselves, particularly when it comes to the fiduciary responsibilities that form the foundation of everything they do. Even the most well-intentioned trustees must take care to fully understand their obligations as fiduciaries to prevent inadvertent errors that could potentially leave them in violation of their fiduciary duty. As we welcome these individuals to their important roles, we would like to take the opportunity to address some frequently asked questions, drawn from many years of experience in trustee training.
I am a new trustee on the board of a police and firefighters’ pension system elected by the police members. I owe a fiduciary duty to my constituents—the police members—to always act in their best interests. Correct?
Not exactly. Trustees owe a fiduciary duty to all the members of a public pension plan—not just the membership group from which they were elected. This duty of loyalty is central to every statement of fiduciary duty.
The duty of loyalty means that a trustee wears only one “hat.” The courts have determined that a trustee may not, at the same time he or she is serving as a fiduciary for all members, wear a second hat as a representative of the entity that appointed him or her. This can be hard, as constituents may expect their elected “representative” on the board to take care of their needs. But as the courts have consistently held and the U.S. Supreme Court has reiterated, the duty to the trust beneficiaries must overcome any loyalty to the interests of the party or parties that appointed the trustee.
But as a governor’s appointee to a state pension board, shouldn’t I be primarily concerned with the taxpayers? After all, taxpayer money flows into the fund from the state, which is the employer.
Trustees of public retirement systems are not fiduciaries for appointing authorities, employers who pay into the systems, unions, constituencies from which they are elected, taxpayers, or the public. Rather, as noted, the duty of loyalty provides that trustees always act in the best interests solely of the members and beneficiaries.
The duty of loyalty is closely related to and informed by the exclusive benefit rule, which provides that trustees shall administer their pension systems for the sole and exclusive benefit of the members and participants. The pension plan’s assets are held in a trust, and once contributions are made to that trust—whether by employees who are members of the plan or by states or municipalities who continue as employers—those contributions become part of the trust.
Moreover, public pension plans are generally considered “qualified” retirement plans under the Internal Revenue Code, which allows for tax advantages such as tax-deferred contributions and earnings growth for employees participating in the plan. The Internal Revenue Code specifies that no part of the corpus or income from the trust may be used for purposes other than for the exclusive benefit of the employees or their beneficiaries. Any violation of this “exclusive benefit rule” could put the tax qualification of the plan at risk.
As a fiduciary, I feel that “the buck stops with me.” Isn’t it my job to make decisions—not the job of the staff or outside experts?
The role of the board is certainly as the final decision-maker, but the answer to the question posed is a little more complex. The importance of governance is critical, since research indicates a strong positive correlation between good governance and a performance premium. The role of the board is one of oversight. As noted by the National Association of State Retirement Administrators, boards are established to oversee the operations of the system, to ensure that the system is fulfilling its statutory responsibilities related to retirement system functions. The board is also charged with establishing the policies of the system and with strategic planning. Staff, on the other hand, has responsibility for the day-to-day operation of the system, as well as the implementation of the policies and strategic plan set by the board. Consultants provide the outside expertise that enables both the board and staff to better fulfill their respective responsibilities.
Fiduciary law provides that a trustee has a duty to personally perform the responsibilities of a 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, and in monitoring those to whom they have delegated responsibility, trustees owe a duty to the beneficiaries to exercise fiduciary discretion and to act as a prudent person of comparable skill would act in similar circumstances (duties of prudence and care).
The law recognizes that a trustee cannot personally perform every function and does not possess all required expertise. Thus, trustees are authorized to delegate; delegation is, in fact, a critical part of a proper exercise of fiduciary duty. The decisions to appoint and monitor delegates are fiduciary functions: the trustee has a duty to properly select delegates and to monitor them.
Remember that fiduciaries are judged by the decision-making process they follow. Do you as a trustee have sufficient information from experts, both staff and independent outside experts? Does your board engage in a rigorous decision-making process in a manner consistent with procedural prudence? The process undertaken should be documented to demonstrate prudence in decision-making. And finally, fiduciaries have an ongoing duty to monitor decisions to make sure those decisions remain prudent.