Advisory Council Report of the Working Group on Fiduciary Education and Training

November 8, 2002

Introduction and Overview

Assistant Secretary Combs met with the Advisory Council at its first meeting this year and indicated that the Department was considering an educational initiative to help fiduciaries comply with the myriad requirements of ERISA. This is, she noted, consistent with the Department’s view that generally it is preferable to assist fiduciaries with compliance than to catch and correct errors after the fact. It is more cost-effective for the department and for plans, and works better for participants (since errors once made can be difficult to correct). 

Assistant Secretary Combs urged us to take on as one of our projects this year the topic of fiduciary education, which she said would be particularly valuable to the Department. The Council agreed to take on this project, with the hope that it would provide important information for the Department in its educational initiatives.  In doing so, the Council was also aware that earlier this year the House of Representatives passed a pension bill that included an amendment offered by Representative Marge Roukema, which would have required the Department of Labor to make educational resources available on an ongoing basis to persons serving as fiduciaries.

At the outset we tried to work out the issues that we would need to consider. A list of these questions appears as an Appendix to this report. But among the most important of these questions were (i) what do we mean by fiduciary education; (ii) what types of educational opportunities are currently available to plan fiduciaries; (iii) how effective are these programs in helping fiduciary performance; (iv) what are the types and causes of fiduciary errors; (v) do fiduciaries in large and small plans have different educational needs; (vi) what types of subjects and issues should fiduciary education emphasize; and (vii) what is the proper role for the Department of Labor to take in developing, expanding, and improving fiduciary education.

We want to make four additional observations at the outset:

First, we heard from an extraordinary array of able and thoughtful individuals, some representing professional organizations and some speaking on their own behalf. They included representatives of the major organizations of professionals who advise fiduciaries on compliance issues (the American Bar Association, the American Institute of Certified Public Accountants, and the American Society of Pension Actuaries); attorneys for small and large plans (including attorneys who educate their clients about fiduciary matters); attorneys for participants; a representative of the largest insurer of ERISA fiduciaries; representatives of the primary professional organizations representing large and small plan sponsors; the professional organization of human resource professionals; representatives of sponsors of the some of the most imaginative and comprehensive educational programs for fiduciaries; the creator of BenefitsLink, the computer-resource most utilized by benefits professionals; a former administrator of EBSA; representatives of the IRS, the Department of Labor, and the National Association of Securities Dealers (NASD) involved in educational outreach. There were, not surprisingly, important differences in perspectives, but there was also a surprising amount of agreement on where education can help fiduciaries perform better. We strongly urge anyone interested in the issue of fiduciary education to read through the transcripts of our work group’s hearings and the many educational materials and other exhibits provided to us during those hearings.

Second, most fiduciaries have their hearts in the right place and want to perform well. This may not be surprising but it certainly supports the idea that education has an important role to play in fiduciary compliance: a pure heart and an educated head are the prerequisites for a high level of fiduciary performance. A Departmental initiative to expand and improve fiduciary education can make a real difference for the well-meaning but untrained fiduciary.

Third, there was virtual unanimity that fiduciaries in small and medium sized plans are different from fiduciaries of large plans: they face different issues, have less time and resources to obtain education and professional advice, and pose particular problems with respect to outreach efforts by the Department of Labor and organizations that sponsor educational programs. We heard witness after witness indicate that many fiduciaries of small plans are unaware that they are cloaked in fiduciary status and ignorant of the duties such status requires. Many of our recommendations are aimed at providing education for such fiduciaries, for this is where we think educational efforts can have the most substantial positive impact.

Fourth, as one of our witnesses put it, with the collapse of retirement savings plans in Enron and other recent corporate failures focusing attention on and awareness of fiduciary responsibility, we may be in a “teachable moment.”

Working Group Proceedings

At our first meeting, on July 17, 2002, the working group discussed the issues to be studied. The working group also heard testimony from Donald Trone, President of the Foundation for Fiduciary Studies; Martha Hutzelman, a partner in the law firm of Bosley Hutzelman; William Schmidt, a partner in the law firm of Kirkpatrick Lockhart; John Baylely, Vice President of the Chubb Group of Insurance Companies; David Rhett Baker, a benefits lawyer who runs BenefitsLink; Marc Machiz, a partner at the firm of Millstein, Cohen, Hausfield & Toll; Eli Gottesdiener, a partner at the Gottesdiener Law Firm; Jane Zanglein, Provost of the National Labor College at the George Meany Center; Bob Pleasure, Executive Director of the AFL-CIO’s Center for Working Capital; Laurie P. Havanec, Director, Employee Benefits and Human Resources Systems at United Technology Corp., on behalf of the ERISA Industry Committee; Ed Ferrigno, Vice President, Profit-Sharing/401(k) Council of America; and Mary Jost, Senior Director of Education, International Foundation on Employee Benefits.

At our second meeting, on September 19, 2002, the working group heard testimony from Phyllis Borzi, counsel at the law firm of O’Donoghue & O’Donoghue and a research professor in the Center for Health Services Research and Policy at George Washington University; Bruce Ashton, a partner in the law firm of Reish, Luftman, McDaniel & Reicher, on behalf of the American Society of Pension Actuaries; Richard Koppes, counsel at the law firm of Jones-Day and Co-Director of Executive Education Programs at Stanford University School of Law; Scott Henderson, a partner at the law firm of Bingham & McCutchen and program advisor and faculty member at the Fiduciary College, Stanford University School of Law; John Hotz, Deputy Executive Director, Pension Rights Center; Gary Tidwell, Vice President, National Association of Securities Dealers; Michael Barry, President, Plan Advisory Services Group; Joyce Mader, a partner at the law firm of O’Donoghue & O’Donoghue; Antoinette Pilzner, a lawyer at Butzel Long, on behalf of the Society of Human Resource Management; Mark O’Donnell, Director of Customer Education and Outreach, Employee Plans Division, Internal Revenue Service; and Alan Lebowitz, Assistant Secretary, Program Operations, EBSA, Department of Labor.

At our third meeting, on October 17, 2002, the working group heard testimony from Dennis Mahoney, Director, Certified Employee Benefit Specialist Program, Wharton School, University of Pennsylvania; Lisa Winton, Technical Manager, AICPA, Ian Lanoff, a partner at the Groom Law Group; and Paul Antsen, Technical Training Director, EBSA, Department of Labor.

Findings

Fiduciary Education Can and Does Play an Important Role in Compliance with ERISA

No witness testified against the value of fiduciary education. Indeed, we heard considerable testimony that fiduciaries want to do the right thing but need to be educated about their responsibilities in order to fulfill them. One of our witnesses, Richard Koppes, put it well when he said that a pure heart and an empty head were not enough, “that there is no such thing as a prudent klutz.” Indeed, the need for education of ERISA fiduciaries is pronounced, whether a fiduciary is involved with plans of large or small employers. ERISA is an exceedingly complex and continually evolving statute. Several of our witnesses have noted that the statute is at once complex and sweeping in scope, and that over time a sometimes bewildering array of judicial and agency interpretations have made it more so.⁽¹⁾  ERISA is one area in which you may not only need a weatherman but may need to obtain an advanced degree in meteorology to know which way the wind blows.

Education for fiduciaries of both deferred compensation and employee welfare plans is essential if such fiduciaries are to keep current. And as we will discuss below, while it may be unreasonable to expect that fiduciaries of plans in small firms can keep abreast of every development in such a complex regulatory environment, such fiduciaries are still in need of education, particularly about what a fiduciary under ERISA is and what responsibilities such fiduciaries have.

Small Plan (and other “part-time”) Fiduciaries Have Different Educational Needs than Professional Fiduciaries of Large Plans

Virtually every witness who appeared before us stressed that there are two universes of ERISA fiduciaries: professional fiduciaries, who generally are responsible for the administration and asset management of large plans; and “part-time” fiduciaries, who tend to come in two varieties: the fiduciary of a plan of a small employer and the relatively inexperienced employee or union member suddenly thrust into a fiduciary role by being named to a company benefits committee or to a trustee position in a Taft-Hartley Trust. As noted above, professional fiduciaries are expected to keep current with regulatory developments and investment strategies; they must know the statute well enough to handle quotidian plan administrative details and to recognize complex situations requiring professional advice. Programs for such fiduciaries are probably not appreciably different from programs aimed at professionals practicing in the employee benefits area.

The fiduciary of a small plan and (the untrained employee or union member who suddenly becomes a fiduciary) to a large extent have different needs. Several of our witnesses noted that the fiduciary of a small plan is likely to have many other job responsibilities and may be unaware that he or she is a fiduciary. Dennis Mahoney, who develops materials for the EBSA’s internal training program and who also develops curriculum for the Employee Benefits Specialist Certification program jointly sponsored by the Wharton School and the International Foundation of Employee Benefits, observed

Oftentimes the administrator of benefit plans at a small employer has multiple administrative responsibilities within the organization and spends a minor portion of his or her time with benefit programs. He or she may have so many other job responsibilities that he or she is hardly aware of the fiduciary requirements of the law. At seminars on fundamentals, I've often met individuals who are literally amazed to learn of the attendant fiduciary responsibilities in administering a benefit plan.

This idea that many small plan fiduciaries are unaware of their status or responsibilities was echoed by numerous other witnesses. For example, Antoinette Pilzner, speaking on behalf of the Society of Human Resource Management, notes: “Many HR professionals fail to realize that the basic day-to-day tasks of administering an employee benefit plan can give rise to fiduciary responsibility.” Similarly, Ed Ferrigno of the Profit Sharing/401(k) Council of America, testified that “while many small plan sponsors are adequately aware of their fiduciary responsibilities, we all know that many others when asked will likely respond what is a fiduciary?” Thus, education for fiduciaries of small plans must be concerned with such basics issues as what a fiduciary is and what responsibilities a fiduciary has.

In addition, small plan fiduciaries are not likely to have to deal with sophisticated investment issues or the voting of proxies on stock. They are more likely to need education about how to exercise prudence when selecting plan service providers and investment providers, how to resolve questions regarding plan benefits, how to fulfill statutory obligations on reporting, disclosure, and participant communications, and how to recognize and solve other compliance issues as they arise. Martha Hutzelman, for example, noted that some of the areas in which small plan fiduciaries would benefit from education are “claim administration, communicating with participants, preparing required notices and disclosure.” Some of our witnesses, including Ian Lanoff, also suggested that small plan fiduciaries would benefit from elementary education about types of investments.

There are Numerous Educational Resources Available Today, But they are Mostly for the Professional Fiduciary and Their Professional Advisors

We heard testimony indicating that there is a rich plethora of educational resources available today. The International Foundation for Employee Benefits sponsors numerous high quality programs. The Fiduciary College at Stanford University and the Institute for Fiduciary Studies offer sophisticated programs dealing with sophisticated investment and other asset management issues. The Foundation for Fiduciary Studies has been developing best practices for determining investment choices and the Related Center for Fiduciary Studies at the University of Pittsburgh sponsors programs to deepen fiduciary understanding of investment management. The Labor College at the George Meany Institute and the National Coordinating Committee on Multiemployer Plans run training and education programs for trustees of Taft-Hartley plans. ASPA, the ABA, the American College of Employee Benefits Counsel, AICPA all sponsor high-quality programs for their members. More than 11,000 individuals, many plan fiduciaries, subscribe to BenefitsLink, a daily computer newsletter on regulatory and other developments. There are live programs, web-based programs, satellite programs, phone-in conferences, written materials. One of our witnesses, Phyllis Borzi, noted that one could, if one wanted, attend an ERISA educational program every day of the year.

We also note that not all of the available programs are sponsored by independent organizations. Scott Henderson, a partner at Bingham & McCutchen and a program advisor and faculty member at the Fiduciary College, Stanford University School of Law, noted that some programs, for example, are sponsored by investment firms; while these programs can be quite valuable, they are not likely to give much attention to controlling investment fees. Such programs are also likely to contain sales pitches.

There are Obstacles to the Creation of Formal Educational Programs for Small Employers

There are reasons why the market has not produced many formal educational programs for fiduciaries of small plans. Such fiduciaries often have many non-benefits responsibilities at their firm and cannot afford the time to attend educational programs for fiduciaries. Small firms might find it hard to justify the financial cost of tuition, travel and other expenses to attend out-of-town programs. Moreover, it is not necessarily easy to do outreach to such fiduciaries to make them aware of programs. It is not surprising, then, that market forces have not resulted in the creation of an abundance of programs for fiduciaries of small plans. Some witnesses suggested that one means of reaching the small plan fiduciary was through groups and organizations that interact regularly with small businesses. Ed Ferrigno of the Profit Sharing/401(k) Council, for example, suggested that the Department “Think about the Chamber of Commerce, the Restaurant Association, the home builders, the printers, that kind of an organization.” Martha Hutzelman similarly observed that trade organizations and chambers of commerce are good organizations for educational outreach to such employers.

Plan Type May Also Be a Significant Driver in the Type of Education Sought By Fiduciaries

Some witnesses suggested that fiduciaries in defined benefit plans are more likely to seek education on maximizing investment returns than fiduciaries of defined contribution plans, since good performance in defined benefit plans directly helps the bottom line of the plan sponsor while good performance in defined contribution plans does not. One witness, Michael Barry, suggested that the availability of data about defined contribution plan performance could motivate fiduciaries to perform better, particularly if private entities used such data to rate fiduciary performance. This might create demand for better performance of fiduciaries in defined contribution plans.

In addition, several witnesses noted that fiduciaries of welfare benefit plans, particularly health care plans, had some distinct educational needs, particularly in the area of compliance with a detailed and complex regulatory structure providing a variety of participant protections, ranging from benefit continuation, privacy, benefit access, and restrictions on pre-existing condition limitations.

There is a Perception Among Some Fiduciaries that the Department of Labor Does Not Encourage Use of Plan Resources for Fiduciary Education

Some witnesses, particularly those who work with Taft-Hartley plans indicated that at one time the Department of Labor sometimes raised questions in audits about the appropriateness of using plan resources for sending fiduciaries to educational conferences. Although the Department is no longer skeptical about the value of education and in fact believes it is critical to ensuring statutory compliance and building retirement income security for the nation’s workers, stories of the Department’s former ambivalence continue to circulate among some plan fiduciaries and their advisors. In part because of this, some in the employee benefits community have a perception that the Department does not regard fiduciary education as important.

(We note that several witnesses lauded the Department’s efforts to send Departmental representatives to educational programs for fiduciaries and their advisors and that this has helped counter the misperception that the Department does not strongly endorse the value of fiduciary education. Richard Koppes, for example, observed that this” sends a very important message. That if someone from Washington is going to travel across country and interrupt a vacation, or whatever it is, to participate, that tells the plan sponsor community that, hey, they are paying attention to this.”)

Fiduciary Education Comes in Many Forms

Several witnesses told us that education means more than simply seminars.

For example, guidance from the Department of Labor and other governmental agencies is an important educational resource. Some witnesses also suggested that fiduciaries would be helped by a plainly-written handbook, which might identify common fiduciary issues (and perhaps include best practices)—what Bruce Ashton referred to as “Fiduciary Obligations for Dummies.” Chubb & Sons has prepared a book for its clients entitled “Fiduciary Liability Loss Protection,” which may be a model for this sort of education. Bruce Ashton testified that ASPA and Nationwide Insurance have also developed materials of this nature, including both written materials and a web-based program.

Information provided to fiduciaries about compliance from attorneys, accountants, actuaries and other professionals, and by service providers, is also a source of fiduciary education. Best practice information, whether it comes from the Department of Labor, professional or other organizations, can also be useful to fiduciaries. (See below)

David Baker described numerous internet-based educational resources for fiduciaries. The websites maintained by the Department of Labor, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation, are particularly important educational resources.

Benefit advisors at the Department of Labor are also a valuable educational resource. Alan Lebowitz told us that last year the Department received almost 20,000 phone inquiries from plan sponsors, fiduciaries and service providers; some of our witnesses, however, were not aware that this service was available.

Computer and Other Electronic Technology Offer New and Cost-Effective Means of Providing Educational Outreach for Fiduciaries

Several witnesses noted that new technologies have made delivery of education easier and more cost-effective. For example, phone-in conferences and computer-based conferences and teaching materials are relatively inexpensive and do not require a fiduciary to travel to attend a conference. Mark O’Donnell, Director of Customer Education and Outreach, Employee Plans Division, Internal Revenue Service, testified about a computer-delivered newsletter on compliance developments, which now has 14,000 subscribers. One advantage of computer-based materials is that they can often be accessed at a time most convenient for the fiduciary.

David Baker, the publisher and editor of BenefitsLinks, presented an imaginative and stimulating vision of how the Internet can play an expanded and more important role in fiduciary education in the future. Mr. Baker also described the rich of array of materials currently available on the Internet. (We recommend that the summary of Mr. Baker’s testimony, which appears in this report, and that his actual testimony, be consulted by interested persons. For information on how to acquire Mr. Baker’s testimony, contact the EBSA Public Information Office.)

Governmental Agencies Sending Representatives to Speak at Conferences Enhances the Effectiveness of Such Conferences

Several witnesses spoke about the value of governmental speakers at conferences and were complimentary of the Department’s efforts in ensuring a governmental presence whenever requested. Participation in conferences can be exceedingly helpful in notifying fiduciaries and their advisors about Departmental concerns and regulatory activities, and in providing informal guidance about compliance. Deputy Assistant Secretary Alan Lebowtiz noted that the Department sends representatives to hundreds of conferences each year.

Most Witnesses Opposed Mandating Fiduciary Education or the Standardization of Conference Curricula

Laurie Havanec, who testified for the ERICA Industry Committee, spoke for most witnesses in opposing mandated fiduciary education. In her view (and the view of many other witnesses, mandating such education

will discourage employers from establishing and continuing plans and expose fiduciaries and employers to greater legal liability and a storm of litigation in disputes over whether the mandate has been complied with. . . .Worse yet, a mandatory program runs the risk of creating the impression that it is sufficient; that employers and fiduciaries need do no more than what is mandated. This would not be merely disappointing, it would be damaging to the system.

Similar objections were raised to mandatory certification or licensing of fiduciaries.

Moreover, Ms. Havanec and several other witnesses were skeptical that the Department should be involved in efforts to standardize curricula for educational programs, at least for large employers, who are served by existing programs and have differing needs that would not be addressed by, as Phyllis Borzi put it, "one size fits all" fiduciary training programs.

Some witnesses, however, testified that the Department might sponsor some of its own programs or partner with other organizations. Mary Jost, of the International Foundation for Employee Benefit Plans, for example, suggested three models for the Department to consider if it planned to sponsor its own programs: one in which the Department would directly develop programs; one in which the Department would work with universities; and one in which the Department would use a university extension approach.

Several Witnesses Indicated that the Department Could Provide Valuable Fiduciary Education by Making Available Additional Guidance, Especially Guidance Including Best Practices

Several witnesses discussed the desirability for increased guidance from the Department of Labor. For example, Bill Schmidt, a partner at Kirkpatrick Lockhart, indicated that a cornerstone of fiduciary education should be Department “standards that are predictable, consistent and well articulated.” And Phyllis Borzi argued that “the most important thing that the Department of Labor can do in the fiduciary education area is to continue to issue, on a regular and consistent basis, guidance for fiduciaries.”

Bruce Ashton, who testified for ASPA, Donald Trone, Ian Lanoff, Bill Schmidt, and Joyce Mader who testified for the National Coordinating Committee on Multiemployer Plans, each suggested that the Department consider guidance that includes best practices in particular fiduciary areas. Bill Schmidt, for example, observed that a useful kind of guidance “could merely be observations of people who are knowledgeable in the area about what they feel best practices should be.” Here is what Mr. Ashton said: “the DOL should work towards developing best practices for fiduciary conduct – fiduciary conduct by both in-house fiduciaries and experts hired to assist the plans. . . .

What should best practices cover?” Mr. Ashton provided some examples: information about creating a written investment policy statement; the frequency of and methods for monitoring activities; and record retention. Donald Trone’s Institute for Fiduciary Studies has been developing a best practices approach to investment decisions, to “identify the minimum procedures for selecting investment options, diversifying portfolio assets, preparing an investment policy statement, controlling investment related expenses, monitoring investment options, and avoiding prohibited transactions and conflicts of interest.” Mr. Trone suggested that the Department might set up a standing committee of outside advisers to create and continually update such standards.

Joyce Mader pointed out that the Advisory Council in 1997 did in fact prepare a best-practices guide to selecting and monitoring service providers. We note with parental pride that this report has been the most frequently requested report of this council.  Ms. Mader indicated other types of “plain English” guides for fiduciaries should cover the legal effect of a fiduciary’s delegation of responsibilities to service providers and the extent to which a fiduciary may prudently rely on advice provided by service providers.

Laurie Havanec indicated that in addition to providing additional guidance, the Department of Labor should focus on making existing guidance more accessible:

One approach we believe worth considering is for the Labor Department to offer more accessible educational material that is useful to fiduciaries. The EBSA already does a good job producing some educational material, but much more could be done. For example, the EBSA now produces interpretive bulletins, advisory opinions, speeches, and reports, including Advisory Council reports. If these materials were more accessible, they could help to educate those fiduciaries who need educating.

The EBSA's Website makes it apparent that the EBSA's emphasis has been on educating participants, on assisting fiduciaries to correct breaches that have already occurred, and on assisting plan administrators in completing their Form 5500s. Greater emphasis might be placed on using the Website as an educational resource or tool for fiduciaries to give them guidance in advance, before problems arise.

Ian Lanoff suggested that the Department could also profitably expand the use of district offices to provide education; that such offices could organize more conferences for fiduciaries and benefits consultants.

Witnesses Disagreed About the Role of Service Providers in Facilitating Fiduciary Education

Several witnesses observed that record-keeping and investment service providers have close contact with fiduciaries of small plans. Some witnesses suggested that such service providers could be (and are) a source of education for fiduciaries or could (and do) encourage fiduciaries to seek education. Other witnesses were skeptical, since such service providers generally do not want to take actions that might make them a fiduciary and since service providers might have conflicts of interest that would affect the type and quality of education that they might provide. In addition, Martha Hutzelman suggested that some service providers are not well informed and are not in a position to provide adequate information to plan fiduciaries.

Most witnesses who considered the issue, however, seemed to believe that lawyers, accountants and other professionals do provide valuable education to fiduciaries of plans both large and small. Indeed, some of the professional advisers who testified before the working group—including Martha Hutzelman, Bill Schmidt, Ian Lanoff, Joyce Mader, and Phyllis Borzi—that they often provided hands-on, personalized fiduciary education for their clients. Phyllis Borzi

The greatest purveyors, the most numerous purveyors of fiduciary education, are really the people who provide services to the fiduciaries, because they are the people that interact with the fiduciaries on a regular basis. And the JCEB, the ABA, and all of the other professional organizations see it as part of ﷓﷓ an important part of their mission to help educate the people who provide advice and guidance to fiduciaries.

It should be said, though, that organizations such as the ABA and AICPA, which provide educational programs for professional advisers to employee benefit plans, do not generally include sessions in such programs on how to communicate effectively with their client fiduciaries about fiduciary status and the responsibilities such status imposes.

Numerous Partnering Opportunities are Open to the Department

Representatives of the providers of fiduciary and professional benefits education without exception indicated an eagerness to work with the Department of Labor, particularly in developing programs for fiduciaries of small and medium-sized plans.

Several Witnesses Noted that Fiduciary Education Should Not only be Focused on Compliance, But with Enhancing the Benefits Participants Receive from their Plans

Michael Barry was one of the witnesses noted this distinction in the context of fiduciary management of defined contribution plans:

[W]e talked a lot about education for compliance . . . and I want to change the subject and focus on another issue, which is probably the one that bothers me most about the sort of level of education of fiduciaries in the pension world . . . and that is education for performance, and the performance of fiduciaries. In fact, if I could make a distinction between compliance and performance. Compliance is basically not doing anything that breaks the law. To me, performance in the pension area is defined very, very roughly, is that if you do a good job, participants have more money when they retire than if you don’t do a good job.

Most Witnesses Praised the Department’s Efforts in Making Available Educational Resources for Fiduciaries

Several witnesses praised the Department for its current efforts at making educational resources available to fiduciaries. For example, several witnesses praised the Department’s timely, thoughtful and clear guidance on fiduciary matters growing out of the terrorist attacks on the United States in 2001. As noted, witnesses lauded the Department’s participation in educational conferences. The Department’s continually improving Website was also commented on by several witnesses, including David Baker, the editor of BenefitsLink. The recent decision to release field memoranda was also singled out for praise. Witnesses indicated that the Department is moving in the right direction in providing guidance and other educational resources and should not only continue in this direction but should also further publicize its efforts and the availability of educational resources.

Witnesses Suggested Numerous Topics and Issues that Might Be Appropriate Areas for Fiduciary Education

Our witnesses had numerous suggestions about what might be appropriate topics for fiduciary education. Many witnesses, for example, indicated that fiduciary education should cover the following areas: financial background; how to select, monitor and evaluate service providers and investment managers and vendors; benefits claim administration; disclosure and reporting; substantive health plan rules; who is a fiduciary; to whom do fiduciaries owe duties; the nature of those duties. Bob Pleasure, Executive Director of the Center for Working Capital, indicated that fiduciary education should be aimed at helping the fiduciary ask “the pertinent question.” Dennis Mahoney, who develops curriculum and teaches in the Certified Employee Benefits Specialist program sponsored by Wharton and the International Foundation of Employee Benefit Plans, suggested that fiduciary education should also include an historical and policy overview of employee benefits regulation, to create meaningful context for rules.

Interactive Education, Particularly in a Format that Encourages Participants to Direct Accumulated Knowledge and Experience to the Solution of Problems, Can Be Highly Effective

Witnesses affiliated with the Stanford University Fiduciary College and the National Labor College at the George Meany Center each testified about the importance of interactive education. Richard Koppes and Scott Henderson discussed the programs at Stanford’s Fiduciary College. These programs combine lecture with interactive participant discussion. Here is Scott Henderson’s description of the program:

It is a 2½ day program, with a mix of academic B- there is black letter law discussions, and together with some really nuts and bolts hypotheticals, case studies, and practical advice for folks who actually run pension funds.

We gave you a set of three hypotheticals that we used last time around, and gain one for each of the various types of plan sponsor, and it was a terrific device to really get discussions started about not theoretical problems, but real practical issues that face plan sponsors, whether it is conflicts of interest, whether it is prudent management, whether it is how to report to your superiors in a corporate setting about things it may not want to hear.

But a terrific discussion, I think, gave some folks some good ideas to take back to their employers. You take a look at this directory, or this agenda, and you will see that things were fairly carefully crafted.

We put together lectures about various principles, with follow-on discussions about how to implement them, again with the case studies. So identifying half-a-dozen different themes, and we took our time to weave them into a fairly coherent narrative.

Similarly, at the National Labor College’s programs for trustees, there is strong emphasis on interactive education. Mr. Pleasure emphasized that the focus on education should be on developing the ability to ask the pertinent question. To develop this you cannot simply have lecturers. Education must be learner centered. Programs should be interactive, involve discussion and teaching by the participants, and simulations and role playing. Mr. Pleasure and Ms. Zanglein indicated that this style of education best equips fiduciaries to develop the type of focused critical facilities they need to meet their statutory obligations.

There are Limits to What Fiduciary Education Can Accomplish

Don Baylely noted that fiduciary violations (among insured fiduciaries) are most likely to occur when fiduciaries face conflicts of interest. It is simply difficult, given human nature, for an individual to serve two masters. Mr. Baylely noted that

the single most troubling allegation or type of allegation when I have to monitor the defense of one of these matters is that of the conflict of interest. . . . The correlation between senior corporate executives with difficult fiduciary obligations to their shareholders and to the corporation also sitting in a joint capacity as fiduciary on employee plans, ESOPs, and investment plans is frightening. Those dual capacities, although recognizable and appropriate under the law, are very, very difficult to manage after the time of the loss.

Eli Gottesdiener, a participant’s attorney, discussed examples in his practice that illustrated how these conflicts can result in reduced investment returns for participants.

Education can sensitize fiduciaries to the problems of a conflict of interest but will not make such conflicts disappear.

In addition, fiduciary education will not have an impact on those few fiduciaries with an impure heart. Marc Machiz, who served for 12 years as Associate Solicitor of Labor responsible for the Plan Benefits Security Division, noted that some “professional fiduciaries are just terrible at what they do. But if they are terrible, they're not terrible for want of an education, they're terrible by choice. They've chosen to make a living by providing a cut-rate service. Worse, they've chosen to make a living by catering to the very worst instincts of the people who hire them, or by deceiving the people who hire them. . . . Government supplied, sponsored, encouraged education, any variety of education you guys might be studying is not going to do anything to help with the problem of bad professional fiduciaries.”

Thus, education can never be a complete substitute for enforcement. Some witnesses, including Mr. Machiz, and John Hotz of the Pension Rights Center cautioned against moving resources from enforcement to education. On the other hand, Ian Lanoff, who served as Administrator of the EBSA in two presidential administrations, disagreed with the notion that enforcement resources should not be used to provide education:

I don't see it that way. I don't see that distinction between enforcement and education. I don't see the Labor Department's role then in the early days or now as being one of playing gotcha with plan fiduciaries where you come in and you say we gotcha because you violated this requirement or that requirement. I see the role of the Labor Department continuing to be one of providing education to fiduciaries, not just enforcing the law and educating fiduciaries through bringing lawsuits or even issuing regulations or letters on what the fiduciary requirements are.

Gary Tidwell, Vice President of the National Association of Securities Dealers, discussed how he sees the relationship between education and the NASD’s enforcement mission in a way that is instructive for the relationship between fiduciary education and enforcement in ERISA:

Education is one cornerstone of the greater NASD mission of investor protection. Specifically, an effective educational program is the cornerstone to carrying out the NASD's mission of investor protection and market integrity.

NASD subscribes to the adage, "Better trained financial professionals lead to heightened regulatory awareness, and more consistent industry compliance. Hence, better overall investor protection.

Our education and our training are seen as embracing, and are in furtherance of our regulatory mission. Of course, and this goes without saying, nothing we do in the educational area can in any way compromise our regulatory responsibilities.

Recommendations

We recommend that the Department of Labor make clear its commitment to education in a variety of ways. First, we believe that the Department should issue guidance making clear that a fiduciary has an obligation to perform competently, which implies a duty to be educated with your responsibilities to the plan. We recommend that this guidance indicate that Departmental audits of plans may, in appropriate cases, include examining the efforts plan fiduciaries are making to ensure adequate knowledge of their responsibilities under the plan, the statute, and to participants and their beneficiaries. We do not, however, believe that the Department should mandate any particular type of education, nor do we believe that its resources can best be utilized by direct involvement in the development of model curricula for educational programs. Fiduciaries of different plans have different educational needs and the market is already providing a rich variety of educational resources for professional fiduciaries and their advisers.

We recommend that the Department appoint a national coordinator of fiduciary education and outreach to work with the field offices and to periodically convene summits on how to stimulate demand for educational programs and other resources and on how to expand and improve educational resources, including web-based resources. This will allow the Department to get feedback on the educational resources it provides, allow experts not in contractual relationships with the Department to make recommendations to the Department, and can facilitate dialog between individuals and entities that might not otherwise have opportunities to discuss and coordinate educational resources.

We recommend that the Department continue efforts to augment, improve, and publicize its Website. We specifically recommend that the Department work with the Internal Revenue Service and the PBGC to coordinate their Websites so that a fiduciary dealing with a particular problem can have access to guidance from each relevant agency. We also recommend that the Department take steps to publicize its Website, particularly with respect to small-plan fiduciaries. This might include seeking links to the Department’s Website on other Websites, both other ERISA Websites and non-ERISA Websites that might be used by plan fiduciaries (such as those of trade associations.) The national coordinator referred to in B. above should seek feedback from fiduciaries and their advisors on how to enhance and publicize the Website’s functions for fiduciaries and their advisors.

We recommend that the Department continue to expand its written guidance, and particularly that it develop or otherwise make available best-practice guidance. Examples of best practice guidance are the Department’s “A Look At 401(k) Fees for Employers” and the Advisory Council’s report on selection of service providers. We also recommend expanded use of question-and-answer format for guidance; publication of common fiduciary errors (sort of a list of “worst practices”); that it provide, where appropriate, fiduciary checklists. We also recommend, particularly, that the Department publicize the availability of such guidance.

We recommend that the Department encourage and stimulate the development of educational opportunities for fiduciaries in the small plan universe. Education for such fiduciaries should focus on their understanding that they are fiduciaries, what a fiduciary is, and what a fiduciary’s role is under the statute. We believe such education should emphasize, in particular, the fiduciary’s responsibilities in selecting and monitoring plan service providers; the areas in which the statute imposes substantive rules and regulations, including rules on minimum standards, and disclosure and reporting; and how to obtain assistance in resolving fiduciary issues.

In carrying out this recommendation we specifically suggest the following actions:

• That the Department convene a summit of the major organizations and individuals who currently provide education to ERISA fiduciaries and their professional advisors to discuss (a) the creation of educational materials and programs aimed at such fiduciaries and (b) how to stimulate demand for such programs.
• That the Department provide seed and grant money for the development of programs and materials aimed at small plan fiduciaries by outside providers of fiduciary education.
• That the Department create an experimental scholarship program to enable small-plan fiduciaries to attend fiduciary education programs.
• That any programs developed through financial support from the Department be evaluated for effectiveness and that recipients of scholarship assistance from the Department provide feedback on the value of their educational experiences;
• That the Department’s outreach to fiduciaries of small plans include trade organizations, chambers of commerce, and the Small Business Administration.
• That the Department prepare on both its Website and in hard copy a fiduciary handbook/primer aimed primarily at fiduciaries of small plans.
• That the Department consider providing a dedicated hotline for fiduciaries to obtain direction from Department personnel, and in any event, publicizing the availability of benefit advisors to plan fiduciaries. We again note that last year the Office of Participant Assistance and Communication handled approximately 20,000 calls from plan sponsors, fiduciaries and their advisors. With publicity about the availability of such assistance, the volume of such calls might increase appreciably. We note that the current name of the office suggests that its assistance is limited to participants; thus, we would also suggest that a separate program within the Office be created aimed at fiduciaries and their advisors.
• That the Department issue guidance on best practices in areas specifically germane to small-plan fiduciaries in their performance (we note that currently most guidance from the Department is designed for consultants and advisers to fiduciaries rather than the fiduciaries themselves).
• That the Department encourage regional offices to expand its sponsorship of conferences and engage in other educational outreach to small employers.
• That the Department encourage professional organizations such as the ABA, AICPA, and ASPA to include in their continuing education programs sessions on how to provide effective fiduciary education to their client fiduciaries as part of their normal professional relationship with such clients.
• That educational efforts to reach fiduciaries of small plans and other part-time fiduciaries be a priority for the national coordinator of education.

We recommend that where appropriate Department consent decrees with fiduciaries require the fiduciary to develop a plan for obtaining fiduciary education.

We recommend that the Department continue to make its employees available as speakers at conferences sponsored by other groups. We also recommend that speeches of Department representatives be placed on the Department’s Website, when available and where appropriate.

We recommend that the Department’s own internal materials (for example, the in-house training material) be made available to interested persons through its Website and in hard copy form.

We recommend that the Department focus on what Robert Partician characterized as the “community policing model,” in which education at the field level is seen as part of a continuum with enforcement activity. We endorse the concept of field offices sponsoring conferences and engaging in other outreach to plan fiduciaries, which we understand the many offices are currently doing.

We also recommend that the Department explore having at least one fiduciary in each plan periodically acknowledge in writing that he or she is a fiduciary. Particularly, but not exclusively, in the small plan arena, such acknowledgment might focus attention on the seriousness and importance of the fiduciary enterprise. We also note that the Department should carefully analyze the costs and benefits of such a requirement. In particular, several of our members were concerned that such a requirement might foster the perception that this is an added requirement that might subject fiduciaries to a greater risk of liability. Although this perception would not be accurate, it might have an adverse effect on plan formation. But to the extent it can focus the attention of fiduciaries on their existing responsibilities under the statute, such a requirement might contribute to a greater overall degree of compliance.

We note that many of our proposals do not require expenditure of funds from the Department and those which do (grants to seed the development of educational programs for small employers, scholarship assistance on a limited and experimental basis for fiduciaries in small business settings, one or more summits) are not unusually resource intensive. We note that fines and penalties assessed against breaching fiduciaries might be targeted to fiduciary education (as well as to an orphan plan program, which is recommended by the Work Group on Orphan Plans).

Summary of Testimony Received

July 17, 2002

Testimony of Donald Trone

Donald Trone spoke on behalf of the Foundation for Fiduciary Studies, a nonprofit foundation whose mission is the definition and promulgation of practices that constitute a prudent process for investment fiduciaries. Mr. Trone began by noting that there are no industry standards defining minimum due diligence procedures for an investment fiduciary. Specifically, there is a pressing need to “identify the minimum procedures for selecting investment options, diversifying portfolio assets, preparing an investment policy statement, controlling investment related expenses, monitoring investment options, and avoiding prohibited transactions and conflicts of interest.” Mr. Trone observed that under present law there is not even a clear mandate for a plan to adopt an investment policy statement, which Mr. Trone suggested is essential to prudent investment management. The Foundation that Mr. Trone directs is in the process of preparing due diligence procedures that, if followed, would satisfy these various concerns. (These standards, as they are being developed, are in the public domain.) Mr. Trone suggested that many investment fiduciaries, who believe they are behaving in prudent fashion, in fact violate at least some basic elements of prudent investing.

Mr. Trone suggested that the Department of Labor should form a committee of investment fiduciary experts to draft a handbook or similar materials on prudent investment practices. A standing committee would be able to adjust investment practice standards in response to changes in our knowledge and understanding of investments. Such a committee could also address ethical issues. Such standards--which Mr. Trone suggests would be a sort of best practices approach--would not have the force of regulations, but could be used to assist training organizations in developing curricula and other training materials. Mr. Trone indicated that the Foundation is ready, willing and able to assist the Department with its educational and training efforts.

The Council and Mr. Trone discussed whether investment standards such as those that the Foundation is preparing should be in the province of the Department of Labor, an organization such as Mr. Trone’s, or perhaps through the International Standards Organization. A concern was that if the Department produced a set of minimum standards that it would have something like the force of law, which might not be desirable.

Affiliated with the Foundation is the Center for Fiduciary Studies, which operates in association with the University of Pittsburgh. The Center puts on various training programs. One program, of two and a half days duration, teaches how to run asset allocation studies, write investment policy statements, select money managers and mutual funds, read performance reports, analyze fees and expenses. A longer program instructs on how to conduct an audit or review of an investment committee. This program is designed for attorneys and accountants, primarily. Since 9/11, however, participation in the programs has dropped, from about 500 annually to about 125. As a result, the Center is building web-based tools to help fiduciaries meet investment prudence standards.

Testimony of Martha Hutzelman

Ms. Hutzelman practices exclusively in the area of employee benefits and ERISA, and represents large, medium-sized and small businesses. Before co-founding her law firm, Ms. Hutzelman was a senior attorney in the Employee Benefits Division of the Office of Chief Counsel at the Internal Revenue Service, and before that was a benefits lawyer for the Kerr McGee Corporation.

Ms. Hutzelman testified that her clients, regardless of size, are “desperate for information regarding their fiduciary obligations.” She and her partner have often been asked to come in house and talk with the people responsible for the plan. In such situations, the training is generally to determine who are plan fiduciaries and then to determine their plan obligations.

Ms. Hutzelman notes that when we speak of fiduciary obligation we often focus on just investment matters, but obligations also involve the operational facets of the plan: claim administration, communicating with participants, preparing required notices and disclosure. Ms. Hutzelman also cautioned us not to ignore health benefit plans, which are heavily regulated.

Ms. Hutzelman indicated her concern that many small employers rely on third party vendors for information; she believes that many such vendors are not knowledgeable about many aspects of plan management and do not have the resources to train their employees to provide fiduciary information to plan sponsors. Yet “often the employers are assuming that their vendors are the plan fiduciaries and that the employers have no responsibility at all for what these vendors are doing, because they have hired these third party contractors to handle it.” But this is not correct, the buck stops with the plan sponsor and other fiduciaries. She noted that requiring better service from providers would be helpful.

Ms. Hutzelman gave as an example of effective government educational programs the IRS’s efforts with respect to 403(b), where there was a concern with noncompliance. The IRS, using publications and seminars at a local level, raised awareness of compliance issues.

In response to questions, Ms. Hutzelman indicated one good way to reach the small plan fiduciary is through chambers of commerce and trade groups. Education at meetings of such groups can be alerting them to the need to focus on their status as fiduciary and their responsibilities as such.

Testimony of Bill Schmidt

Mr. Schmidt began with the observation that “most fiduciaries want to be compliant.” This is not only because the want to do the right thing or to avoid liability for making errors. In the case of financial institutions, there is reputational, or franchise, value in being a compliant fiduciary. He also noted, though, that in a real world of finite resources there is always going to be limitations on how much “time and brain power” will be available for ERISA compliance. Given this, Mr. Schmidt stressed the importance of having “standards that are predictable, consistent and well articulated.” And this insight should be the cornerstone of fiduciary education and training.

In looking at the availability of fiduciary education now, Mr. Schmidt indicted that lawyers are pretty well served by such organizations as ALI-ABA, PLI and trade associations. But moving away from lawyers, things get spottier. Financial professionals do not get quite the same quality of training as lawyers, and plan sponsors, because of their many competing responsibilities. Even in large corporations, you often have people with responsibility for plan management who have many other human resource responsibilities.

The Department can best contribute to fiduciary performance by being clear in what is expected. Part of this is simply issuing more guidance. “It could merely be observations of people who are knowledgeable in the area about what they feel best practices should be.” The government can also support private organizations by lending them resources of various varieties. And finally, the Department can lead by action, by having consistent priorities, which are rewarded and penalized. Part of this could be the Department, on audit, asking to see a plan’s compliance procedures. Enforcement should reflect “the need of fiduciaries to follow prudent procedures in making plan investments.”

Mr. Schmidt, in response to questions, indicated that an important way to improve fiduciary performance is to improve the quality of services provided by vendors. “The quality of service is only going to get raised if the plan sponsors are demanding. Plan sponsors are only going to demand if they realize that ultimately they’re at risk.”

Mr. Schmidt indicated that he sometimes would go out to meet with clients about fiduciary responsibilities. A problem, though, is that fiduciary compliance services are not generally something “that many employers are willing to pay a great deal for. I do it . . . to identify ERISA issues . . . but they do get some training from their lawyers and I think that can be helpful.”

Testimony of John L. Baylely

Mr. Baylely is claims counsel and vice president of Chubb & Son, the largest issuer of insurance to ERISA fiduciaries. Mr. Baylely first described the architecture of fiduciary liability insurance. Fiduciary insurance is generally written on a claims made rather than occurrence basis. This means that coverage is triggered only after the filing of an actual complaint. There are strict reporting and notice requirements under fiduciary policies. Mr. Baylely noted parenthetically that sometimes people defend themselves without realizing that they had insurance protection. He also said that there is not an unusual amount of awareness of the availability of fiduciary liability insurance. Most policies cover both statutory breaches and negligence errors in plan administration. Most policies do not cover deliberate dishonesty or willful intentional statutory violations. They also have other exclusions, including claims for benefits under a policy. The insurer will generally defend those claims, but not pay if there is a benefit obligation at the end of the day. Policies also generally do not cover claims for settlor functions.

Underwriters look for many things, including the integrity of the sponsor organization and its senior management. The also look at the financial solvency of both the sponsor and the plan. The underwriters also review recent 5500s. Underwiters also look at claims history, who administers the plan, who makes investment decisions, and sometimes at third party service providers. The insurer generally will ask the purchaser to certify that the plan is in compliance with ERISA and whether they have any knowledge of prohibited transactions or other facts that might give rise to claims in the future.

Chubb does provide materials to their insureds on loss prevention. It is difficult to measure how effective these materials are and whether they are used. Mr. Baylely indicated a suspicion that such materials are generally used by the conscientious and thus ironically by those with the least need for them.

In terms of claims experience, between 40 and 50% of the claims involve benefit disputes. About 15 to 20% involve imprudent investments, misrepresentations to participants. The remaining 30 percent of the inventory is harder to classify but involve terminations, spin-offs, mergers, section 510 discrimination claims, and various benefit reductions. Recent claims experience reflects heightened scrutiny of investments in employer stock.

Mr. Baylely said that from his perspective, “the single most troubling allegation or type of allegation when I have to monitor the defense of one of these matters is that of the conflict of interest. . . . The correlation between senior corporate executives with difficult fiduciary obligations to their shareholders and to the corporation also sitting in a joint capacity as fiduciary on employee plans, ESOPs, and investment plans is frightening. Those dual capacities, although recognizable and appropriate under the law, are very, very difficult to manage after the time of the loss. I’m not sure that corporate America understands the risks involved in those dual capacity services. Similar problems arise in the labor management field involving trustees with strong affiliations to union and management.

In response to questions, Mr. Baylely said that underwriting does not currently take into account educational efforts on the part of fiduciaries because it would be too difficult to quantify. But if there were certification programs, guidelines, “that when we looked at an insured, we could say this insured is well-trained in its obligations . . . I think that that would have an impact on the rating and premium charge for that risk.”

Again in response to questions, Mr. Baylely indicated that he would emphasize who a fiduciary is, how the sponsor organization should select a fiduciary, how to train a fiduciary, who their obligations run to, the corporation versus the participants in the plans, and the hazards of operating in a dual capacity, potentially conflicting situation.

Testimony of David Rhett Baker

Mr. Baker publishes, writes and edits BenefitsLink, which is a daily newsletter on benefit plans, linking to other Internet resources. BenefitsLink has two editions, one on retirement plans and one on welfare benefit plans. Eleven thousand people subscribe to the newsletter on retirement plans and approximately 7,000 to the newsletter on welfare benefits plans. Mr. Baker serves a “kind of middleman,” who directs the attention of benefit professionals to important benefit news on the Internet.

In thinking about the Department of Labor’s role in education, Mr. Baker noted that the DOL should conceptualize itself as a vendor of sorts and provide easy information access and technical support to what are in effect its clients. The Internet provides effective possibilities. Mr. Baker indicated that the DOL Website, which was recently reorganized, does a very nice job towards providing an educational foundation. Mr. Baker did think, though, that the Department could improve its Website by putting in one place clickable links to resources about employee plans. He also indicated that differentiating perspectives on a web page--so that there is information for participants, for plan sponsors, etc., can be helpful. The PBGC Website does a good job in terms of its ability to put the language, the regulatory information into “Dick-and-Jane” language, and also has good organization and menu display. Mr. Baker suggested that the Department may want to look at this and the IRS Website to get further ideas on how to enhance its own Website.

Mr. Baker indicated that at this point, with the technology still developing, he would not recommend that the Department get too involved in using its Website for interactive educational programs. He indicated with respect to interactivity that “a well-designed series of simple static web pages, information, presented in an organized way with the ability of the reader to click right to that part of the table of contents that interests him or her, that’s a form of interactivity. Really careful thinking about what it is you want to display on the Website and breaking it into small hypertext link chunks . . . should be encouraged.” As an example, he said that the Department could “do things that almost seem oblivious, but are sol helpful, like making defined terms, fiduciary for example, a clickable link to a glossary that then refers the person to similar pages about the definition of fiduciary.” Mr. Baker also said in his experience, people generally prefer a text-based presentation of information.

Mr. Baker also described efforts that some groups--Corvel and the American Society of Pension Actuaries--are doing with webcasts. He also singled out the J. Kaiser Family Foundation for its webcasts in the health care arena. The web also permits surveying of participants during a webcast.

Mr. Baker suggested that the Department of Labor could benefit from partnering with other organizations, building on their viewers by having them link to the Department. There may be some disadvantages to this, too: privacy concerns, image consciousness of some possible partners, etc. Among the organizations that Mr. Baker said are doing very good jobs with their Websites or internet resources are the Employee Benefit Research Institute, the National Center for Employee Ownership, the American Benefits Council, the Profit Sharing/401(k) Council of America, the American Society of Pension Actuaries, the International Foundation of Employee Benefit Plans, the International Society of Certified Employee Benefits Specialists. There are other possible media partners for the Department: for example, Plansponsor.com, and 401(k)helpcenter.com. And of course there is BenefitsLink. There is also commercial media such as BNA and Tax Notes.

Mr. Baker did note that there may be some conflicts with some potential partners: BenefitsLink, for example, derives revenue from recruitment advertising and this might, he suggested, be of concern to the Department.

He also spoke some about the use of message boards, which form part of BenefitsLink. This can be an easy way for a plan sponsor or fiduciary to get information (on an anonymous basis) and then to have the information (in question and answer form) available to others.

Testimony of Marc Machiz

Mr. Machiz served twelve years as Associate Solicitor at the Labor Department for the Plan Benefit Security Division. He began by observing that there are a stunning variety of people who are ERISA plan fiduciaries. There are investment managers, third party administrators, plan sponsors. Mr. Machiz noted that “they are all out there, the good, the bad, the ugly, the brilliant, and the stupid.”

He divided the fiduciary world into two different categories: the professional and the amateur fiduciary. The professional fiduciary is generally an institution. He indicated that some professional fiduciaries are “just terrible at what they do. But if they are terrible, they’re not terrible for want of education, they are terrible by choice. They’ve chosen to make a living by providing a cut-rate service. Worse, they’ve chosen to make a living by catering to the worst instincts of the people who hire them, or by deceiving the people who hire them.” No amount of education will transform these bad fiduciaries into good fiduciaries. And the good fiduciaries will seek out education on their own, whether the Department supplies, encourages or sponsors it.

The only thing that will force the bad professional fiduciaries to do a good job is fear: fear of liability, fear of exposure, fear of loss of reputation, fear of prison. Fear is a powerful motivator. The Department has awesome powers, the power to issue an administrative subpoena and to bring light to wrongdoing. It is critical for the Department to have a strong enforcement program, for it is only a strong enforcement program that will incent the bad professional fiduciary to do a decent job (and obtain education and training).

Mr. Machiz did think Department involvement in the education of the amateur fiduciary might have merit. These are the people, Mr. Machiz believes, “who need whatever help it is we’re in a position to provide. These are the guys who age going to benefit from it; these are the guys who deserve it.”

Funds for education should come from industry, to the extent possible. On the pension side, the investment industry benefits from small plan formation and could finance at least some educational programs for the small plan sponsor. On the health side, the insurance companies benefit from plan formation and might be expected to sponsor some education. A board might be established with people from the professions, academia, and the government.

The government’s role should be in making clear what its enforcement agenda is, which is the one area of expertise it has that the private sector does not. “In describing its enforcement agenda, obviously the government is in the best position to educate people about what the Government is doing and about what the Government cares, and should be a fair broker between competing interests.”

Testimony of Eli Gottesdiender

Mr. Gottesdiener endorsed the testimony of Mr. Machiz (summarized above). He added to the idea of fear the idea of shame: the Department should publicize some of the more egregious cases, use its Website to have links to cases of real people who have stolen real money from plans.

Mr. Gottesdiener focused on the role of the corporate employer who sponsors a pension plan--they remain a fiduciary for the purpose of selecting, appointing, monitoring and removing fiduciaries. They have the responsibility of overseeing fiduciaries. Ensuring that they understand their role is critical and should be part of any educational efforts on the part of the Department.

Mr. Gottesdiener indicated that what he has seen in some cases is an abdication of fiduciary responsibility, where basically no one is minding the pension plan store because there is a conflict of interest that motivates or incentives the company sort of not to put someone in charge of these other people and to appoint fiduciaries who really don’t know what they’re doing to allow conflicts to fester and be exploited by business considerations. Drawing on some of his cases, Mr. Gottesdiener was skeptical that education alone can be sufficient to counter conflicts of interest.

Testimony of Bob Pleasure

Mr. Pleasure is Executive Director of the Center for Working Capital, which is affiliated with the AFL-CIO. Prior to his assuming this position, Mr. Pleasure was Director of the George Meany Center for Labor Studies for 13 years. Mr. Pleasure continues to work with the Meany Center’s National Labor College, which sponsors programs for trustees of negotiated plans.

Mr. Pleasure began by stating that he did not believe the Department of Labor should offer its own education courses. There are educational institutions that are better equipped to provide such programs than a governmental regulatory agency. The regulatory agencies need to support educational programs and should make available, through the web and otherwise, resources for fiduciaries. But this is different than sponsoring coursework or developing curricula for such programs.

Mr. Pleasure emphasized that the focus on education should be on developing the ability to ask the pertinent question; that a trustee of a pension plan needs this ability. To develop this you cannot simply have lecturers. Education must be learner centered. Programs should be interactive, involve discussion and teaching by the participants, and simulations and role playing. It is only through this type of experience that the important abilities for fiduciaries can be developed.

The programs that Mr. Pleasure works with begin with a needs assessment, the development of goals and objectives and criteria for evaluating the goals and objectives. The programs also develop sets of instructional strategies.

Testimony of Jane Zanglein

Professor Zanglein began by discussing the distinction between education and training. In training, a participant hears a well-educated person at a conference who tells participants what he or she thinks the participants need to know. But it does not come out in a way that most participants will retain it. The participants will come away without the necessary building blocks, they will not have spent time tackling difficult problems together. Education emphasizes the building blocks and interaction and participation.

The most important thing for a teacher who is trying to educate is to be clear and organized. Organization implies developing learning objectives and translating those into a curriculum. The Labor College, in developing the learning objectives, relies upon an advisory council, which helps in curriculum development.

The Labor College has four courses that range from two to two and half days each. They are sequential and the Labor College does them regionally. The first course is an introductory one, an overview of the role of the trustee. The second course is a fiduciary duty course. The third course is on capital markets and investments. The fourth course focuses on corporate governance issues.

The first course looks at the duties of trustees, which comes from the trust instrument. What course considers what responsibility and authority the trustee has. The course looks at the difference between settlor and fiduciary functions. The course also has a brief introduction to fiduciary duty.

The second course is a comprehensive course on fiduciary duty, covering the exclusive benefit rule, the diversification rule, the rule requiring conformance with the plan documents, and the rule of prudence. Much of the course examines these duties in the context of a plan document. The third course focuses on investment policy statements and also provides an overview of the capital markets, asset classes, compounding, inflation, asset allocation, asset class risk, etc. The idea is to prepare participants to draft and follow investment policy statements.

The last course focuses on corporate governance and accountability, with attention on proxy and voting guidelines.

Testimony of Laurie Havanec

Ms. Havanec, on behalf of the Erisa Industry Committee, emphasized three points: first, that major employers are already making substantial efforts to ensure that the fiduciaries of their plans understand their responsibilities under ERISA; second, that a mandatory education program will not help matters and could discourage plan sponsorship and increase costs; and third, the Department should consider assisting in the education of fiduciaries of smaller plans.

Employer sponsored plans have been remarkably successful in providing a rich array of benefits efficiently and effectively. Fiduciary breaches, at least serious ones, are rare. The publicized recent cases do not appear to be so much about ERISA breaches as serious corporate malfeasance. A requirement of education is response to these recent unique high profile cases would be inappropriate.

Moreover, fiduciaries vary in their structure and responsibilities. It is apparent that no single educational program will be appropriate for all fiduciaries. Given the variety of plans, plan designs, and types of fiduciaries makes it impossible to design a single or even multiple educational programs for all programs.

Fiduciaries of large plans are also subject to strong incentives to understand and comply with their statutory responsibilities. Institutional fiduciaries have reputational interests in performing well and employer fiduciaries understand that their employers’ interests in the plans are serving the needs of its employees. Moreover, ERISA and the tax laws provide strong enforcement and tax penalties, which discourage conduct violative of a fiduciary’s statutory obligations.

One area in which the Department could consider is in making more accessible educational materials useful to fiduciaries. The EBSA already does a good job in this, but much more can and should be done. The EBSA’s Website traditionally has been oriented for the participant; the Website should include more information for plan fiduciaries.

Testimony of Ed Ferrigno

Mr. Ferrigno indicated first that he did not think the issue of fiduciary education for fiduciaries of large plans is an issue, since fiduciaries of these plans are concerned with compliance and training and education are a part of compliance. In the small plan area, however, some fiduciaries are not fully aware of their status or what their status requires of them. In many cases, such fiduciaries believe that their responsibilities are being fulfilled by their third-party service providers. By and large service providers do a good job of keeping plans in compliance, and to this happy fact we can add that the owners of small businesses generally have a major stake in their plans and are thus have a personal stake in the plan’s success.

But fiduciary education is nevertheless important. The PSCA has a goal of no harmful fiduciary breaches; it is critical for this goal to be achieved that all plan sponsors understand their roles vis-a-vis the service provider and must know that they cannot delegate their fiduciary responsibilities. This is especially important in the relatively rare case where a third party administrator does not provide necessary services or information to the plan sponsor.

The PSCA advocates a one-stop educational service that covers all governmental compliance responsibilities. Thus, it is important for the Department to coordinate with the Internal Revenue Service, which has an active study of small plan compliance underway. It is essential that any governmentally sponsored or supported educational program not add additional mandatory requirements for plan sponsors, for this could dampen employer willingness to sponsor plans. Emphasis should be placed on helping plan sponsors comply with the law. The Department should also partner with the private sector to take advantage of the numerous available educational resources.

To reach small employers the Department should consider partnering with the Small Business Administration, the Chamber of Commerce, and trade associations in which small employers are active in disseminating educational materials.

Testimony of Mary Jost

Ms. Jost testified about the purpose and organization of the International Foundation, which is a non-profit educational association that has been providing educational services in the employee benefits industry for almost half a century. The historical focus has been on education for trustees in multi-employer plans, but the Foundation has broadened its educational mission to extend to other plans as well. The Foundation has provided education to between 12 and 14 thousand labor and management trustees that have attended some 35 different educational programs.

Ms. Jost painted three alternative approaches that the DOL might take in supporting fiduciary education. For each model, outreach would be critical. In the first model, the Department with both governmental and nongovernmental partners (including educational and professional organizations such as the ABA, ASPA, AICPA and others) would create a planning committee, which using focus groups, surveys and the experience of its members would work in preparing curriculum for a two-day course, reflecting the reality that not many people will be able to attend a longer course of studies. The planning committee would also create assessment methodologies.

The second model would use universities and their faculties. The Department would work with universities to develop curricula. The third model would use university extensions, with instructors drawn from ERISA professionals. Ms. Jost noted that a number of universities currently are involved in various forms of fiduciary education, including Stanford University, the National Labor College, the University of Pittsburgh (the Center for Fiduciary Studies), Cal State-Fullerton, and George Washington University.

The Department might also consider funding courses so that the cost to attendees could be reduced, thereby stimulating attendance.

September 19, 2002

Testimony of Phyllis Borzi

Ms. Borzi testified before the Workgroup as an individual but also as an active participant and frequent co-chair in the many educational programs of the Joint Committee on Employee Benefits (JCEB) of the American Bar Association (ABA).

The educational activities of the JCEB are aimed primarily at professional advisors rather than at fiduciaries themselves. (Many JCEB programs are co-sponsored with other professional organizations such as AICPA, the Society of Actuaries and the American Academy of Actuaries.) Ms. Borzi expressed the view that it is critical to target professional advisors for fiduciary education because it is those lawyers, accountants, actuaries and other consultants that are the “greatest purveyors of fiduciary education” because they interact with fiduciaries on a regular basis.

She went on to note that ERISA is comprehensive, complicated and continuing to develop through litigation and regulation. She also noted its multidisciplinary nature that requires a variety of people with varied skills. For these reasons, she cautioned against any “one size fits all” fiduciary education program. Nor did she think that the Department of Labor (DOL) should play a role in providing education programs, except to the extent that it might encourage fiduciaries to recognize their responsibility to be trained in this area as well as to continue their education in later years.

Ms. Borzi stated that the most important thing that DOL can do is to continue to issues guidance for fiduciaries. She complimented the Department on its efforts in recent years to make its guidance more user-friendly and accessible to the consumer. She noted the use of Q & A formats and concrete examples.

She echoed concerns raised by other witnesses about conferences held in exotic locations. She noted that even though a fiduciary may be more interested in education than the locale, attendance at some of these meetings might actually be imprudent.

The programs sponsored by the JCEB utilize a number of techniques: live programs, satellite programs, teleconferences and the recently introduced teleweb concept. She noted the networking opportunities afforded by the live conferences, while recognizing that they may be the least economical option. At the other end of the spectrum, some states are reluctant to give Continuing Legal Education credits for participation in teleconferences because there is a widespread fear that little education actually takes place which participants are busy with other activities while ostensibly listening to the conference.

For this reason, the JCEB uses the teleconference approach to address “hot topics”. While the programs are fairly short, they are generally enough to put people on notice as to a new development. Another cost effective mode of delivery is the JCEB’s satellite programs. For these conferences, participants are able to go to a location in their home areas for a live video program beamed to as many as one hundred sites around the country.

Ms Borzi noted that while the teleweb conference mode is very inexpensive it could also be difficult for the presenter. In her experience, the continual distraction of participants’ e-mails arriving on her monitor screen was not conducive to a successful presentation.

With regard to the marketplace for fiduciary education, Ms. Borzi noted that there is no shortage of opportunities for fiduciaries to attend educational programs. However, there is a lack of direction to convince fiduciaries that it is their responsibility to utilize those programs rather than to rely on professional advisors.

In response to a question about whether these myriad opportunities were available to small employers, Ms. Borzi noted that JCEB had worked on a program in conjunction with the Small Business Administration that focused on retirement plans of small businesses. Attendance was not great. She suggested that small business owners are too busy running their businesses and do not see such education as a priority. She hoped that a teleconference might reach a greater audience.

Ms. Borzi noted that many of the problems with fiduciary mistakes do occur in the small business arena. “And its all around the questions of ‘whose money is it anyway? What are plan assets? Are there plan assets at all? What are they and what can they be used for?” She suggested that these are all areas that require fiduciary education.

In response to another question, Ms. Borzi noted that despite improvements in the availability of guidance on fiduciary issues from DOL and others, there remains a problem of professional advisors disagreeing with one another on the proper course of action in important areas. Unfortunately, the fiduciary may choose the advice provided by the advisor with the answer he or she most wants to hear.

In a final note, Ms. Borzi stated that one of the areas overlooked in fiduciary education is the health arena. It is her belief that this is an area where much guidance is also needed.

Testimony of Bruce Ashton

Mr. Ashton s currently co-char of the American Society of Pension Actuaries Government Affairs Committee and will become the organization’s President-Elect n November. ASPA’s more than 5000 retirement plan practitioners provide services to more than half of the pension plans n the United States.

ASPA supports many of the proposals that have been made over the last year to expand remedies for participants and encourage employers to make investment advice available to participants. However the more important issue n Mr. Ashton’s opinion s fiduciary competence - the ability of plan sponsors and service providers to fulfill their fiduciary duties under ERISA.

He emphasis that while this has been a concern ever since employers began to provide retirement plans t s even more a problem since the shift to DC plans which place the financial risk of investments on participants. While investment advice will help to improve results this can only occur if fiduciaries have taken proper steps in the first place. “Put another way even a brilliant job of allocating mediocre funds will still produce a mediocre result.”

Ashton offered an example of an executive who acted imprudently in his selection of investment options and providers. However the fiduciary did not disregard his duties but rather acted out of ignorance of the duty to perform due diligence in investigating options and the need to employ advisors to assist him where he laced sufficient knowledge.

Ashton and ASPA suggest two steps that the DOL might take to address these problems.

First, work toward “best practices” for fiduciary conduct by both in-house fiduciaries and experts hired to assist the plan. (Aston also noted that those experts might not be aware of their own fiduciary duties under ERISA.)

He suggests, for instance, that DOL could provide clear guidance to fiduciaries to the effect that they must prepare a written investment policy and the steps to be taken in selecting and monitoring investments or investment options.

In addition, best practices might include:

• Issues to be covered in the investment policy statement
  • Investment Objectives
  • Investment time horizon, risk profiles and expected returns for the plan
  • Investment structure
  • Asset allocation models
  • Monitoring benchmarks
  • Frequency of monitoring
• Types of due diligence to be done in selecting and monitoring investment options and providers.
• Frequency of monitoring
• Types of due diligence records and how long they should be retained

Ashton recognized that some might find that the issuance of best practices might hamper EBSA’s enforcement activities. Rather, ASPA believes that best practices will reduce the number of situations requiring enforcement action and the best practices will provide evidence of fiduciary breach.

In addition, ASPA suggests that DOL should promote and facilitate fiduciary education including widespread dissemination of those best practices. These efforts might include:

• Educational brochures from EBSA addressing issues that fiduciaries need to consider in administering their plans.
• Outreach programs, in conjunction with the private sector
• Education of DOL investigators to assist EBSA in locating problems when plans are investigated.

Suggested elements for an educational program included:

• Fiduciary self dealing prohibitions
• Agreements with plan service providers
• Understanding plan cash flow and distribution needs
• Maintenance of plan assets
• Trust requirements for assets
• Deposit of deferrals and loan payments
• Need for diversified asset classes
• Need to obtain and review periodic performance reports
• Periodic review of qualitative and organizational changes to money managers
• Control procedures for the review of money managers

Questions

Q: Need for independent fiduciaries in cases where there are conflicted loyalties
A: Especially true in dealing with company stock or issues that involve the company itself…an independent fiduciary is an effective but expensive device to address these concerns…hard to find someone willing to take on the task and to understand the task they are taking on.

Q: Co-Fiduciaries in small plan situations
A: May increase expenses, and who’s watching the co-fiduciary? Monitors his or her selection, etc?

Q: Relationship between small plan sponsors and advisors
A: An advisor can only do so much. They cannot make decisions for the sponsor. The people closest to the plan are the record keepers and yet they still only see the client infrequently.

The plan sponsor must understand fiduciary duties and fulfill them.

Testimony or Richard Koppes and R. Scott Henderson

Koppes: The why of Fiduciary College:

The experience as general counsel to CALPERS and involvement with the National Association of Public Pension Attorneys – general counsel and assistant general counsel from major public pension plans, those responsible for issues of fiduciary duty – and with the Stanford Institutional Investor Forum . . . a place where “mid to large institutions could come without public view, without the press. . .where they could discuss issues of mutual concern. . . Saw the need for impartial sponsor-free fiduciary education….”

The goal of the Fiduciary College was to establish a place where fiduciaries could receive the training they need to meet the standard set down in Donovan v Cunningham: “Pension trustees may not escape the reasonable man, reasonable person, standard of prudence in making investments by having a pure heart and an empty head.”

“There is no such thing as a prudent klutz.”

Henderson: Same kinds of issues face all large plans, regardless of who the sponsor is: prudence, good management, and conflicts of interest. Also face corporate plans, Taft-Hartley plans, foundation endowments and public plans. The program allows for cross-fertilization among people with varied backgrounds, leading to good discussions of best practices.

There are lots of educational opportunities but many have a very important problem: most are sponsored directly or indirectly by investment managers, raising concerns about the quality of the education. “Not going to hear a lot about negotiating fees, for example….”

Having an independent sponsor adds credibility to the Fiduciary College program.

Koppes: Have received support from Stanford as an independent institution with lots of experience with such things as Directors’ College and the Institutional Investor Forum.

Focus on the proper management of other people’s money.

Henderson: Described the course format and materials – nuts and bolts, hypothetical case studies, and practical advice from people that run pension funds. Lectures on principles with follow-on discussions about how to implement them.

Materials are reduced to a CD-ROM, practical materials to take home – ethics codes, governance codes.

Some sponsors, who don’t come to the meetings, underwrite costs. Coca-Cola has provided funding for some scholarships.

Sent out 9,000 invitations last year, had 100 in attendance. Low turnout reflects lack of priority for fiduciary education. Expect increased interest with recent problems in these areas.

Raised several other issues:

DC plans as a source of potential liability for sponsors.

US based subsidiaries of foreign firms that are not familiar with the law in this area.

Testimony of Gary Tidwell

Mr. Tidwell is a Vice President at NASD and is responsible for education and training. The NASD is the world’s largest SRA - Self Regulatory Organization. Over 5,500 brokerage firms are members of NASD, and over 700,000 registered representatives. NASD has a staff of over 2,000, and a budget of over $400 million.

NASD provides educational programs for both outreach and compliance, and is a cornerstone of the NASD mission. The feeling is that better training leads to better compliance. Education can also prevent regulatory ”gotcha”.

NASD educational programs are tailored to forum target audiences: NASD Staff and other regulators, dispute resolution, the investing public and financial services professionals and member firms.

Offerings include CDT and IRT regional training programs, phone-in workshops, district preventative and compliance seminars, advertising and regulatory seminars, industry conferences and the NASD Institute for Professional Development.

Questions

Q: Would the educational programs be as effective or pervasive if not mandated?
A: Some NASD education is required; some is not. Continuing education is offered.

Q: Is there a difference in participation between the mandated and non-mandated programs?
A: Mandated education is critical. NASD provides basic and advanced educational programs. If members want the programs, they are there for them. If not, they don’t have to participate.

Q: Is the certificate program mandated?
A: No.

Q: Is participation in the certification program adequate?
A: Yes. Participation is god, and is a capstone experience for compliance professionals.

Q: Smaller firms - are they participating or is it just the larger firms?
A: Smaller firms are participating. They are aware need it. Smaller firms look for guidance from NASD. NASD wants to make sure the tools are there to ensure compliance.

Q: How are the programs funded?
A: Through dues, and fines.

Q: Why is there a firm element and a regulatory element?
A: NASD wants to make sure everyone is aware of the regulatory requirements. Then, the firms can set up their own training and educational programs suited to their needs.

Q: Does the public use the information available on violations by brokers?
A: Yes, the public uses it extensively.

Q: To what extent does NASD participate in the creation of programs in which they are not sponsoring?
A: The NASD has steered away from approving or endorsing other programs, due to the regulatory aspect.

Q: In the NASD citation system, would settlements sometimes require attendance at educational programs?
A: No. There are guidelines for breaking rules, sentencing guidelines, but they do not include educational requirements.

Testimony of Michael Barry

Mr. Barry focused his testimony on education relating to the performance of fiduciaries. There is a distinction between compliance and performance. One can be educated about compliance, and not break any laws, but still have poor performance as a fiduciary. In the DC world, the big problems are that the interests of the person appointing the fiduciary are not directly connected with the kind of performance that the fiduciary delivers, and that there is no consensus on what is good performance for a fiduciary. The person appointing the fiduciary of a DC plan may be a CFO or someone from HR, but the performance of the participant’s accounts does not impact anyone’s bonus.

It is critical to grade the performance of fiduciaries. Plans should be graded on performance, including risk and fees, then the market will make poor performers try to perform better. Grading will drive demand for better DC plan performance.

In answer to a question, Mr. Barry indicated that mandating certification or education creates some problems, especially for smaller plans. A follow-up question related to the concept of hiring an independent fiduciary where knowledge or education doesn’t exist. Mr. Barry indicated that that was the wrong answer, due to the problem of accountability. If you don’t solve the accountability problem, then you have no way of knowing whether the independent fiduciary is doing any better than the non-independent fiduciary.

Much discussion followed on the concept of ranking DC plans by cost and performance. The discussion involved the usefulness of this information, the probity of who does the rankings, and who would pay for it.

Testimony of Joyce Mader

The National Coordinating Council on Multi-Employer Plans is the only national organization devoted exclusively to representing the interests of the approximately 10 million workers, retirees and beneficiaries covered by multi-employer plans for health and other benefits. One of NCCMP’s core missions is education. Two venues for education include an annual conference and timely updates on significant issues through a “multi-e-alerts” web-based system. Some ME plan members provide educational opportunities and programs for trustees, and some do so in conjunction with employer organizations. There is also a great deal of cross-fertilization, through NCCCMP programs and participation in seminars and conferences arranged by other groups. NCCMP believes that it is important to encourage a wide array of educational opportunities for fiduciaries.

Ms. Mader discussed her experience with previous ERISA Advisory council working groups, and particularly the 1996 working group on Guidance in Selecting and Monitoring Service Providers. This group recommended that the DOL develop and disseminate information to plan sponsors on the following issues:

• a plain language description of the duties of a fiduciary.
• an explanation of the legal effect of delegating authority to service providers
• an explanation of the requirements in selecting and monitoring service providers.

Mr. Ray asked if would be helpful if the DOL issued an interpretive bulletin addressing these issues, and Ms. Mader indicated that that is what they had hoped would happen.

Ms. Mader indicated that the DOL’s emphasis should be on making information available. The NCCMP does not support certification of trustees. Certification would be expensive, plus it could impair people from volunteering to be fiduciaries. The NCCMP would like to see more efforts by government agencies to develop tools and to coordinate among themselves. The voluntary Correction Program is useful. One-stop shopping links on a government Website would be helpful.

Testimony of Alan Lebowitz and Mark O'Donnell

Mr. Lebowitz: The first question is approaching the question about fiduciary education is, to educate who, about what, and by whom? There has been a range of suggestions from the witness about this question. A majority of DOL education and training programs are focused on being part of someone else’s program. DOL representatives appear at hundreds of meetings of different organizations, including the Bar Association, practitioners, accountants, plan administrators, and investment professionals. The DOL works with state insurance commissioners in putting-on specific programs covering specific issues. These programs are very successful, and may serve as a model for other efforts like fiduciary educations.

The DOL Website also has a Compliance Assistance page, and a Participant Assistance page. The department gets over 170,000 inquiries, mostly from participants and beneficiaries, and about 20,000 inquiries from employers, plan sponsors and service providers.

Mr. O’Donnell: Mr. O’Donnell described his office, Customer Education and Outreach, as being fairly new - set up two years ago, and described some of the tools developed to help employers, especially small employers, understand pension plans and life cycles of plans, and setting up plans. There are already 14,000 subscribers to their newsletter. The office also puts on tax forums, with both IRS and DOL people in attendance. They’ve had a very positive response to these efforts. A single forum will attract over 2,000 participants.

Testimony of Antoinette M. Pilzner

The Society for Human Resource Management (SHRM) is the world’s largest association devoted to human resource management, representing more than 170,000 individual members. Founded in 1948, SHRM has more than 500 affiliated chapters in the U.S. and members in more than 120 countries.

The 1.3 million HR professionals in the workforce today are challenged with managing a variety of benefit plans, including ERISA plans. To handle the complexities associated with ERISA, federal laws and state laws, most HR professionals seek advice and counsel from attorneys, accountants and third party administrators. However, deference to others does not relieve the HR professional of a fiduciary duty. It is therefore, essential to educated HR professionals on the scope of the fiduciary responsibility. It is equally important the HR professionals know that they too are fiduciaries. Many HR professionals are unaware that they are plan fiduciaries due to the role they play in administering employee benefit plans.

The apparent disconnect of HR professionals regarding their potential fiduciary position indicates a real need for clarification and education. The recent failures of executives and plan managers at Enron and Worldcom, whether intentional or unintentional, to act in the best interests of their plan participants suggests a need to strengthen all components of compliance, administration and management.

SHRM believes HR professionals need a one-stop program to cover all their government compliance responsibilities with respect to employee benefit plans. This program should comprise a five-pronged approach:

• Identification of the functions that define a fiduciary;
• Determination of who is a fiduciary;
• Education;
• Compliance; and
• Continuing Education

The program should be both initiated by and coordinated with the appropriate government agencies in consultation with industry leaders and representatives. The program should restrain from creating any additional employer requirements or mandates. Program development should consider low- or no-cost development, be easily accessible and epitomize flexibility.

A campaign, in the form of a public service announcement, should be initiated. The announcement would encourage all individuals involved in the administration of employee benefits plans to visit a Website with further information, including trading and education opportunities. The ultimate outcome of any initiative should ensure that HR professionals understand the responsibilities and parameters of fulfilling a fiduciary role.

In response to questions, Ms Pilzner indicated that:

• Questions which come into her office from members regarding problems are typically from small or medium size employers, and usually concern administrative issues.
• There is a hesitance at SHRM to endorse mandated education or certification of fiduciaries.
• Many employees may serve in a fiduciary role, and requiring each to “officially” certify that they know they are a fiduciary raises many issues.

October 17, 2002

Testimony of Dennis Mahoney

Mr. Mahoney is responsible for course development and educational programming for the Certified Employee Benefits Specialist Program, which is co-sponsored by the International Foundation of Employee Benefit Plans and the University of Pennsylvania. He is also the primary designer of the package of materials used by the Department of Labor to train new EBSA employees.

The CEBS Program is a voluntary professional certification program. The program is composed of 10 courses which individuals can take, either on a self-study basis or through classroom instruction. The program has a network of educational partners throughout the country who provide classroom instruction for those desiring the classroom educational experience. Course proficiency is tested with multiple-choice tests.

Upon successful completion of four courses in our curriculum, participants can be qualified as either a Group Benefits Associate or a Retirement Plan Associate. Currently, upon successful completion of 10 courses, participants earn the Certified employee Benefits Specialist designation. CEBS candidates are a diverse group representing all sectors of the employee benefit industry: plan sponsors, consulting firms, managed care organizations, banks, hospitals, law and accounting firms, investment managers, labor organizations and professional associations. There have been almost 10,000 individuals who have earned the CEBS designation. It is important to note that the CEBS designation is a voluntary certification. CEBS candidates are a diverse group representing all sectors of the employee benefit industry: plan sponsors, consulting firms, managed care organizations, banks, hospitals, law and accounting firms, investment managers, labor organizations and professional associations. To the extent that the market place recognizes the certification as an indicator that certification holders possess certain knowledge or skills, those possessing the certification will be sought out to do client work or for employment opportunities.

The program includes not only technical information about employee plan regulation, but also economic, law, accounting, finance, policy considerations, and employee benefit history, to provide context and better understanding of the regulatory requirements providing structure for employee benefit plans. The courses build on each other, with learning objectives intensified as the curriculum proceeds. The subject of fiduciary responsibility is not the title of any particular course but is woven throughout the curriculum.

The people who take the course are generally benefits professionals and not the people who administer an employee benefits plan within a small employer. Mr. Mahoney commented that “Oftentimes the administrator of benefit plans at a small employer has multiple administrative responsibilities within the organization and spends a minor portion of his or her time with benefit programs. He or she may have so many other job responsibilities that he or she is hardly aware of the fiduciary requirements of the law. At seminars on fundamentals, I've often met individuals who are literally amazed to learn of the attendant fiduciary responsibilities in administering a benefit plan. . . . To the extent that the Council or the Department of Labor can effectively raise awareness of the need for both an initial comprehensive overview of fiduciary education and the ongoing need to update this knowledge and of the meaningful educational programs in the market place that that will contribute to a stronger and healthier employee benefits system that values voluntary compliance.”

Mr. Mahoney also asked what should be in a program directed at small employers. He answered that such a program should include an overview of ERISA and both give the historical sort of development of ERISA, cover things like fiduciary principles, go through the various titles and part of ERISA, show the application to benefit plans. Also give some discussion of various types of plan structures, differences between defined benefit, defined contribution plan, how those various ERISA requirements relate to those different types of plans. I think it is possible to design educational programs that in a seminar sort of approach give an overview to plan administrators. I think there are some products out there in the market place that are designed according to that sort of structure.

In terms of reaching small employers, Mr. Mahoney said “any initiative that would encourage education could be very helpful. So the idea of providing seed money to maybe tailor programs for the small employer could be useful. I think that providing scholarships for small plan administrators to take advantage of these programs again would raise the level of awareness and could be a very helpful thing for the market place.

Mr. Mahoney was asked about whether there should be mandatory licensing for fiduciaries. He answered that for small employer fiduciaries this might not be effective because it is a small part of someone’s job.

Testimony of Lisa Winton

Among Ms. Winton’s many responsibilities at the American Institute of Certified Public Accountants is that she works with the Conference Planning Task Force for the annual employee benefits conference. She also works on programs co-sponsored by other groups, including the ABA and the Department of Labor.

The AICPA is the professional association of Certified Public Accountants with more than 350,000 members. Many of its members observe the conduct of both plan participants and plan sponsors through retirement planning. The AICPA believes that education is the cornerstone to enhancing retirement security.

The AICPA has worked to educate the effected populations in a number of ways. For the past 12 years, the AICPA has sponsored an employee benefit plan conference with the Department of Labor. Planned and run by recognized experts in the audit and tax fields of employee benefits, this three day conference includes discussions of recent and proposed employee benefit plan legislative and regulatory initiatives and how these initiatives will affect firm, client and company plans. Officials from the Treasury Department and Internal Revenue Service also participate in panel discussions on enforcement initiatives. Conference participants can receive 24 hours of CPE credit.

In 2002, the AICPA and the DOL jointly sponsored an annual update conference in Washington, D.C. A second update is planned for December 2003. This one-day conference offering eight hours of CPE will cover recent proposed DOL regulations affecting employee benefits. The conference will be held just before auditors begin the planning stage of their annual audit process, allowing auditors to be prepared when they start up their upcoming audits. In the past, the AICPA's CPE course material and conferences have not stressed fiduciary education. However, as a result of Enron-related pension reform developments, new CPE group and self-study courses now cover the responsibilities of plan fiduciaries and delineate best practices.

AICPA conferences will also offer audit and tax panel discussions of fiduciary responsibilities with Department of Labor members on the podium. Fiduciary planning should be done at the inception of the plan. Disclosures would be a good place to start. There is a widespread misunderstanding of the role of the directed trustee and many plan sponsors are given incorrect information by those who sell the investment that are used as funding vehicles. Even if these investment providers do not intend to provide misinformation, they're frequently not well informed themselves.

Part of the educational challenge is to educate those who provide investment services to plan sponsors before they can give advice or service to plans. If handled properly, fiduciary education would not give rise to greater liability risk. Plan fiduciaries could still hire experts. They would just need better tools to identify who is a quality advisor and how to monitor those advisors to ensure the advice given is prudent and the advisor remains qualified to give it.

In terms of the small plan fiduciary being able to understand much of the complexities of ERISA regulation, Ms. Winton was skeptical. She noted that perhaps we to just focus on the professionals to begin with and make sure you're communicating to them and leave it up to them to communicate to their clients basically or to the nonprofessionals.

Testimony of Ian Lanoff

Mr. Lanoff is a lawyer at the Groom Law Group. He was the administrator of EBSA in the Carter and the early Reagan administrations. He has represented mostly defined benefit plans, both in the public and private sector.

Mr. Lanoff indicated that in the early days of ERISA, the Department’s policy reflect the belief that no one would really know or understand the complexities of the law even though the law had been in effect since 1975. By 1977, no one really had learned much and the Labor Department hadn't really done much in the way of providing guidance. There were very few regulations. There were very few exemptions for -- transactions and very few cases that had been brought in the courts.

Thus, the Department basically took the position that it didn't have high expectations. Now that thirty years have passed is there any reason to think that expectation should be any different? Mr. Lanoff was not certain that the answer would be yes, despite the fact that we now have all these years of regulations, exemptions and law cases. It's difficult enough for lawyers to keep up with what's going on in just the fiduciary area. That's where I practice, Title I of ERISA. I'm in a law firm of about 40 lawyers. All of us devote all of our time to employee benefits. About 10 of us are Title I lawyers, but the remainder are tax lawyers, Title II lawyers, or Title IV lawyers, PBGC. We spend a lot of time just talking amongst ourselves and brainstorming because we can't keep up with what's going on and oftentimes we don't even agree as to what legal requirements are. Should expectations be any different, I would say the answer today is not much different than it was almost 30 years ago? Mr. Lanoff observed that if anything, maybe it's more difficult to understand today what the law should be. “I'll just talk about the fiduciary area because any time you bring in court cases, you're going to have differences of opinion by judges.

In the early days, we had the advantage of the Labor Department was the only one really addressing these issues. Now you not only have the Labor Department but you have courts all over the country agreeing or disagreeing with Labor Department positions on many of these issues. So it's very difficult for us to understand what the law requires so imagine how difficult it is for fiduciaries of plans. Although I don't know much about smaller plans because that's really not my practice, I wouldn't only focus on smaller plans. I don't think it's just smaller plan fiduciaries who have difficulties understanding what the law requires of them. I would say it's the larger plan fiduciaries who are as much in the dark as well.”

Mr. Lanoff commented on whether we should be hesitant about using Departmental resources for education. He said that he did not and commented that “I don't see that distinction between enforcement and education. I don't see the Labor Department's role then in the early days or now as being one of playing gotcha with plan fiduciaries where you come in and you say we gotcha because you violated this requirement or that requirement. I see the role of the Labor Department continuing to be one of providing education to fiduciaries, not just enforcing the law and educating fiduciaries through bringing lawsuits or even issuing regulations or letters on what the fiduciary requirements are.”

Mr. Lanoff said that in the time period when he administered the EBSA the field offices made a considerable effort at outreach, sponsoring local conferences and doing other outreach to fiduciaries. He thought that this was very effective and thinks the Department should do more of this in the future: “that was very valuable and I think having the people who are enforcing the law provide the education was extremely valuable and I think we nipped a lot of potential violations in the bud in those days and I think we accomplished quite a bit.”

Mr. Lanoff also indicated that the Department could help educate fiduciaries with more frequent written guidance.

Mr. Lanoff was also a bit skeptical that more conferences would necessarily help most fiduciaries. He noted that he had a Dilbert cartoon in his office, showing what looks like a lawyer giving a fiduciary lecture to her client. She's saying let's cut right to the point. What we have here is complete fiduciary misconduct. I don't know if she's talking about the pension plan. And you see the pointy-headed boss holding his hands over his ears and saying, blah-blah-blah-blah. In other words, you can bring a fiduciary to a lecture but you can’t make him think. But he does think the quality of lectures has improved.

He also testified that the best type of education may be the fiduciary audit: When the people who perform it come in and go through what they've found, it seems much more attention getting because they actually are going through the particular situation at the fund and they almost always find some potential problem and that seems to get the fiduciary's attention. But the issue there is how many people can afford this? It really is only the largest. Some of my public employee clients have over $100 billion in assets. They can afford it. But can even the average Taft/Hartley fund or average public employee fund afford it? So I don't know how useful. They're obviously useful for those who can afford it but are they going to be useful for the medium size and smaller plans?

If Mr. Lanoff were to emphasize a particular type of education, it wouldn't be legal, actuarial, at least for the typical fiduciary. It would be what he called more mechanics or mechanical sort of education and that would be - “we heard a little bit about this earlier -- just a little bit of information about how investments work. It's amazing how little people know who are fiduciaries about how the basic investments work. Maybe how benefits work, how administration works. Just so they can at least be somewhat educated and can do their due diligence.”

Mr. Lanoff also addressed the idea of fiduciaries certifying that they understand their status. He noted that some people “will scoff at that because they'll say well, of course we're fiduciaries. But it might not be a bad idea. I guess one question is who would sign it? For example, the Labor Department is just waiting on the litigation against Enron. So who would sign it? Would a Ken Lay have signed that at Enron or would he just have delegated it to somebody down the line who's on the investment committee? I don't know. Maybe the requirement should be that CEOs of corporations in the corporate area sign. I don't know. I'm sure people would not be happy with that. But that might not be a bad idea.

Testimony of Paul Antsen

Mr. Antsen described the training program used by EBSA for its own professionals. The Department uses two books, which he described as follows:

“One book deals with the industry and it's an introduction to employee benefits from an industry perspective. It talks about the different types of plans and how they're qualified and a little bit about how they operate. It uses a college textbook or close to a college textbook called Pension Planning. It's also used, I think, by the CEBS program, something that you may well be familiar with or you've heard maybe some of the speakers talk about. It's a generic industry text on the area of employee benefits. This is the current version of it. It was just reissued this spring. That's why Mr. Mahoney has been involved with us is that we've had to update this to reflect the most recent version of that text that we've used for a number of years. We've used several iterations of it. So the first volume of our course deals with the industry.

“The second volume of our course deals with Title I of ERISA. That text is put together in-house at EBSA. Initially, we had this also done by Jerry Rosenbloom when we started but we have since brought this in-house and they both together become the materials that are provided to our new employees, our new technical employees that work in the employee benefits area with the expectation that they will go through these materials -- and they are self-teaching in the sense that there are questions and answers at the end that they're asked to work their way through.”

Questions Posed to Witnesses During the Course of Deliberations from the Study Plan for the Working Group on Fiduciary Education

ERISA characterizes as fiduciaries individuals and entities, who have meaningful authority over the assets or administration of employee benefit plans or who offer investment advice to such plans. Some fiduciaries are large investment companies, some are professional investment managers, and some are human resource executives. At small firms, they might be the firm's president or the lead doctor in a practice group. Some fiduciaries are paid for their services, while others serve without compensation.

ERISA imposes on all fiduciaries certain requirements for the protection of the plan and its participants and beneficiaries. These requirements range from broad prescriptions of prudence and loyalty to detailed rules relating to plan structure and administration. The Department of Labor has interpreted and developed these requirements through regulation, other administrative guidance, and enforcement actions, and the federal courts through the resolution of litigation.

Plan fiduciaries must know and understand when and how ERISA's requirements apply to their plan-related activities. The purpose of the Working Group is to study how the Labor Department can promote and support the effective education and training of plan fiduciaries regarding their responsibilities under ERISA.

In furtherance of this purpose, the Working Group will consider various questions including:

• How do plan fiduciaries acquire and update their knowledge about the ERISA fiduciary standards?
• What types of errors do fiduciaries make? Do the types of errors, or the frequency of errors, differ depending on the size or type of the plan or plan sponsor? Are fiduciary errors common?
• What are the causes of fiduciary errors? To what extent do they occur because a fiduciary is unaware of his or her fiduciary status or of particular statutory requirements? To what extent do they occur because a fiduciary must make difficult judgment calls in a complex and constantly evolving regulatory scheme? To what extent do they occur because a fiduciary has made a cost-benefit analysis comparing the cost of compliance to the cost of breach? To what extent do they occur because the fiduciary lacks effective access to expert advisors?
• To what extent can fiduciary education and training improve fiduciary performance under the statute? What are the limits of fiduciary education?
• What do we mean by fiduciary education and training? Do we mean a one-time seminar? Periodic classes? A series of ongoing discussion groups? Resources for self-education (books, online coursesor other resources, etc.)? Ongoing arrangements where fiduciaries can get assistance with problems as they arise?
• What types of fiduciary training and education programs are currently available? Who sponsors them? (Professional organizations, employee organizations, employers, higher education, individual employers, large multiemployer and single-employer plans)? How are programs structured, what do they cost, and who bears that cost? To what extent do such programs aim at different types of plans, fiduciaries, and/or plan sponsor markets? Are there any gaps in the current array of programs (for example, are a sufficient number of programs aimed at fiduciaries of plans at small firms)? To what extent do the programs attempt to provide a comprehensive introduction to plan administrative and management functions and to what extent are the programs more specialized? How is the curricula for such programs developed and how is the faculty selected? Which types of programs work? What criteria do we use to determine whether a program is working? Are there any program accreditation organizations or standards?
• Are there currently programs for accrediting fiduciaries? What benefits do fiduciaries gain from such accreditation? What are the current and possible future uses of such accreditation programs? (For example, should accredited fiduciaries be subject to lower bonding requirements under ERISA?) Should receiving some sort of accreditation (or minimum education) be required or encouraged?
• Assuming that the additional fiduciary education and training programs are desirable, why hasn't the market created them.
• What are potential sources of additional training and education for fiduciaries? Are training programs for pension actuaries, attorneys, accountants, and other professionals adaptable to training of fiduciaries generally? Should third-party administrators and other service-providers (such as sellers of investment services) be encouraged or required to provide fiduciary education to those who contract with them? Is there a need for different types of educational and training programs for different types of firms and/or plans?
• Does fiduciary education create a risk of increased liability, by holding fiduciaries who have been educated to a higher standard of care? Are there other liability risks raised by fiduciary education? Are there any liability risks to the party providing the education? If such risks exist, are there steps that might be taken to eliminate or minimize them?
• What is the role of the government in the education and training of fiduciaries? Should the government try to stimulate either demand for or supply of educational programs through tax or other financial incentives? Does it have a role in creating program or fiduciary accreditation standards, and if so, what should that role be? Should the government play a role in developing standardized curriculum for educational programs?

Additional Information Sources

1. 2002 Index for the Working Group on Fiduciary Education and Training
2. Advisory Council on Employee Benefit and Pension Plans
3. Actual Transcripts/Executive Summaries for the Council's full meetings and working group sessions are available - at a cost - through the Department of Labor's contracted court reporting service, which is Neal R. Gross and Co., Inc. 1323 Rhode Island Avenue, NW, Washington, DC 20005-3701 at (202) 234-4433 or nealgross.com.

July 17, 2002: Working Group on Fiduciary Education and Training

1. Agenda
2. Official Transcript
3. Outline for group's study for the year
4. “Mandating Fiduciary Education Because of High Profile Cases Misplaced, Speaker Says” from the July 18, 2002 BNA Pension & Benefits Daily by Michael Wyand.
5. Written Testimony by Donald B. Trone, President of the Foundation for Fiduciary Studies, plus the Center’s Year 2002 Course Offerings Brochure, the Management of Investment Decisions Flowchart, Prudent Investment Practices (a handbook for investment fiduciaries) and Legal Memorandums for Prudent Investment Practices.
6. Written Testimony of Edward Ferrigno, Vice President of the Profit Sharing/401(k) Council of America
7. Statement by Laurie P. Havanec on behalf of the ERISA Industry Committee
8. My Perspective of DOL Promotion and Support of ERISA Plan Fiduciaries - the Internet Angle by David Rhett Baker, BenefitsLink.com as well as samples of various training programs he has discovered via the Internet
9. Testimony of Marc I. Machiz
10. Employer Fiduciary Liability for Pension Plans Written Testimony by Martha L. Hutzelman, Bosley Hutzelman
11. A packet of promotional materials from the Chubb Group of Insurance Companies provided by John Bayley, Vice President and Claim Counsel, during his testimony
12. “Prudent Man With a Plan - Most 401(k) reforms before Congress don’t address a crucial source of risk: fiduciary duty” from CFO.com by Kris Frieswick, June 18, 2002.

September 19, 2002: Working Group on Fiduciary Education and Training

1. Agenda
2. Official Transcript
3. News article “Recommendations of Working Group Important to Labor Department, Official Says” in the September 20, 2002 edition of BNA’s Pension & Benefits Reporter.
4. Written testimony provided by Phyllis C. Borzi, O’Donoghue & O’Donoghue, representing the educational activities of the Joint Committee on Employee Benefits of the American Bar Association (ABA).
5. Written testimony provided by Bruce Ashton, a partner of Reish Luftman McDaniel and Reicher, representing the views of the American Society of Pension Actuaries (ASPA) as well as “Your Ticket to Fiduciary Best Practices”, a fiduciary handbook for participant-directed qualified retirement plans edited by C. Frederick Reish, Esq..
6. Written testimony of Michael P. Barry, President of the Plan Advisory Services Group.
7. Written testimony of Joyce A. Mader, O’Donoghue & O’Donoghue, representing the National Coordinating Committee for Multiemployer Plans (NCCMP).
8. “Fiduciary Liability of Employers Sponsoring Pension Plan,” a primer used by Martha L. Hutzelman of Bosley Hutzelman, in preparing her clients for their roles as fiduciaries.
9. Written testimony of John Hotz, Deputy Director of the Pension Rights center, on fiduciary education, and a brochure from the center.
10. Written testimony of Antoinette M. Pilzner, CPA, representing the Society for Human Resource Management (SHRM).
11. The National Association of Securities Dealers NASD Institute for Professional Development 2002 Programs, provided by Gary Tidwell, Vice President of Education, NASD.
12. A packet of material from the Fiduciary College sponsored by the Stanford University Law School, presented by Richard H. Koppes, Business Practice Group, Mergers and Acquisitions Practice of Counsel, Jones, Day, Reavis & Pogue, and R. Scott Henderson, Of Counsel, Bingham Dana LLP, who are both instrumental in the program. In addition, Mr. Henderson provided three hypothetical case studies on fiduciaries under pressure.
13. A packet of the many educational brochures/fact sheets available to fiduciaries through an 866 telephone distribution center or via the agency’s web, presented by Alan Lebowitz, Deputy Assistant Secretary, Pension and Welfare Benefits Administration.
14. Employee Plans News, a new quarterly publication of the Internal Revenue Service’s Tax Exempt and Government Entities Division, provided by Mark O’Donnell, Office of Outreach and Education, IRS.

October 15, 2002: Working Group on Fiduciary Education and Training

1. Agenda
2. Official Transcript
3. Possible Findings of the Working Group to discuss in preparation for its final report.
4. EBSA news release announcing a new compliance assistance tool on October 16, 2002.
5. Written testimony of Lisa Winton, Technical Manager with the American Institute of Certified Public Accountants (AICPA)

Advisory Council Members

1. Norman Stein, Chair of the Working Group
2. Robert Patrician, Vice Chair of the Working Group
3. James S. Ray, Council Chair and ex-officio member of all working groups
4. Ronnie Sue Thierman, Council Vice Chair and ex-officio member of all working groups
5. Evelyn F. Adams
6. Carl T. Camden
7. Catherine L. Heron
8. Timothy J. Mahota
9. Dana Muir
10. John Szczur
11. Judy Weiss
12. Michelle Weldon
13. David Wray

Footnotes

1. One of our witnesses, Ian Lanoff, observed that when he was Administrator of the EBSA, most interpretation of the statute emanated from the EBSA.  Today, in contrast, there are literally thousands of judicial decisions, hundreds upon hundreds of pages of substantive regulation and other guidance from the IRS, guidance from the PBGC.  In addition, the statute has been amended virtually annually, with some of the amendments sweeping in scope.