Understanding Your Fiduciary Duty:
Selecting and Monitoring Vendors
Presented by
Katherine A. Hesse
June 5, 2012
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All Rights Reserved.
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Fiduciary Duty
 The definition of fiduciary and the duties applicable to
fiduciaries in M.G.L. c. 32 were modeled after the
requirements for fiduciaries under the Employee
Retirement Income Security Act of 1974 (“ERISA”).
 ERISA was adopted in 1974, while the fiduciary
definition and fiduciary duty sections of c. 32 were
adopted in 1976.
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Fiduciary Duty
 M.G.L. c. 32, Sec. 1 provides: “‘Fiduciary’, any person
who exercises any discretionary authority or discretionary
control respecting management of the funds of any
retirement system or exercises any authority or control
respecting management or disposition of its assets.”
 This language is taken almost exactly from ERISA Sec.
2(21)(a)(i).
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Fiduciary Duty
 M.G.L. c. 32, Sec. 23(3) provides: “Fiduciary Standards.
— A fiduciary as defined in section one shall discharge his
duties for the exclusive purpose of providing benefits to
members and their beneficiaries with the care, skill,
prudence and diligence under the circumstances then
prevailing that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of
an enterprise of a like character and with like aims and by
diversifying the investments of the system so as to
minimize the risk of large losses unless under the
circumstances it is clearly prudent not to do so.”
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Fiduciary Duty
 The fiduciary standard contained in c. 32 is taken almost
directly from ERISA Sec. 404(a).
 The main duty of a fiduciary is to act prudently in
managing the assets of the system in the best interests of
the members.
 By acting prudently within the standard of care, fiduciaries
may limit liability.
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Fiduciary Duty
 Fiduciaries are responsible for:
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Acting solely in the interest of plan participants and
their beneficiaries and with the exclusive purpose of
providing benefits to them;
Carrying out their duties prudently;
Acting within the limits of c. 32;
Diversifying plan investments; and
Paying only reasonable plan expenses.
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Selecting Vendors
 Part of acting prudently and only paying reasonable
expenses includes performing your due diligence in
selecting and monitoring vendors.
 Ch. 176 of the Acts of 2011 included a new procurement
process for the selection of accounting, actuarial,
investment or legal vendors. (M.G.L. c. 32, Sec. 23B)
 Fiduciaries should be aware that they have a duty to
perform due diligence in selecting any vendor.
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Selecting Vendors
 The new procurement process is similar to that required of
other public entities under M.G.L. c. 30B.
 The procurement process is a road map to fulfilling your
fiduciary duties, as following the process will ensure that
you are performing due diligence and documenting your
efforts in selecting vendors.
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Selecting Vendors
 Retirement systems must procure these services through a
competitive process, using a request for proposals.
 The required RFP process includes:
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Providing public notice of the RFP through posting
at the retirement system offices, posting in a
newspaper of general circulation in your area,
posting in a publication of interest to practitioners in
the area for which services are sought, and posting
with the Secretary of State.
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Selecting Vendors
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Providing reasonable time for responses.
Reasonable time is at least 2 weeks but may be
more.
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Selecting Vendors
 The RFP must include all terms and conditions applicable
to the procurement – non-mandatory terms may be
negotiated with the selected vendor.
 Retirement Boards may have their consultant or designated
procurement officer perform the initial evaluation of
respondents to the RFP.
 The Retirement Board selects the most advantageous
proposal, taking into consideration price and the evaluation
criteria set forth in the RFP.
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Selecting Vendors
 All contracts falling under c. 32, Sec. 23B must be in
writing.
 Such contracts must be for a term of no more than 5 years,
including any renewals, extensions or options.
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Exception: contracts for illiquid investments with
required terms of more than 5 years.
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Selecting Vendors
 RFPs for investment service providers, which include
“managers, partnerships, trusts, custodians, consultants, as
well as those providing proxy services, services related to
the financial information (cash books, pooled fund
statements, Annual Statements) retirement boards must file
with PERAC, securities litigation services and other
services which are investment related,” must include
certain mandatory contract terms. See PERAC Memo #27
of 2012.
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Selecting Vendors
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Provision that the vendor is a fiduciary
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Provision that the Retirement Board will not
indemnify the vendor
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Provision that the vendor will annually inform
PERAC and the board of any arrangements in oral
or in writing, for compensation or other benefit
received or expected to be received or paid or
expected to be paid by the vendor or a related person
in connection with the contractor’s services to the
retirement board or any other client;
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Selecting Vendors
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Provision requiring the vendor to annually disclose
to PERAC and the retirement board in writing any
conflict of interest the contractor may have with
regard to the services being provided.
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The statute provides that other mandatory
contractual terms and conditions shall address
investment objectives, brokerage practices, proxy
voting and tender offer exercise procedures, terms of
employment and termination provisions.
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Selecting Vendors
 PERAC has developed new forms that vendors and
Retirement Boards must complete during the procurement
process for investment services. Forms for vendors:
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Vendor Certification of Good Faith Proposal;
Vendor Annual Disclosure of Compensation
Received Form;
Vendor Annual Disclosure of Compensation Paid
Form;
Vendor Disclosure of Conflict of Interest Form; and
Placement Agent Statement
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Selecting Vendors
 Forms for Retirement Boards to complete:
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Retirement Board Procurement Compliance
Certification Form;
Retirement Board Member Certification Form;
Retirement Board Certification of Consultant’s
Reports Form; and
Retirement Board Certification of Prohibited
Investment Compliance Form
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Selecting Vendors
 M.G.L. c. 32, Sec. 23B requires that all written documents
required under that section be retained by the Retirement
Board for at least 6 years from the date of final payment
under the contract.
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Selecting Vendors
 In selecting vendors, there are some basic questions your
will want to keep in mind*:
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What services does the retirement system need?
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Does each candidate possess the expertise and
qualifications needed to perform the services they
propose to deliver?
* Adapted from Hagan, Ronald E., “The Excellent Fiduciary – Pension Vendors Must Be Prudently Selected and Monitored”,
Journal of Compensation and Benefits, May/June 2011.
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Selecting Vendors
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Are the proposed vendors completely transparent
about their ownership, business affiliations, and
revenue partners?
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Are there any potential conflicts of interest for the
vendor?
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Selecting Vendors
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How do the candidates' fees compare against other
vendors of the same services?
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Have the vendors provided all costs and fees up
front and included the costs and fees in the contract?
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Monitoring Vendors
 By acting prudently and performing due diligence in the
selection of vendors, fiduciaries have the right to rely on
advice and information provided by those vendors in
making decisions that affect the retirement system.
 However, fiduciaries have an ongoing duty to monitor all
vendors to ensure that they are providing the contracted for
services and acting with the proper standard of care.
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Monitoring Vendors
 THE NOVEMBER 1996 REPORT OF THE WORKING
GROUP
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The November 1996 Report of the Working Group
on Guidance in Selecting and Monitoring Service
Providers identified the following issues in relation
to the duty to monitor service providers:
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Monitoring Vendors
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1.
Who is responsible for monitoring
the service providers?
2.
What is the process to monitor the
service provider?
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Monitoring Vendors
3.
Are written reports provided by the
service provider?
With what frequency are the written
reports provided?
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Monitoring Vendors
4.
Do the written reports describe the performance of
the service provider as compared to the applicable
written guidelines and/or contract?
5.
Do the written reports provide sufficient information
to adequately evaluate the performance of the service
provider compared to benchmarks or industry
standards?
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Monitoring Vendors
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6.
Is there a process in place to either: (a) correct
any non-conformance with guidelines/contract,
benchmarks or industry standards; or (b) to
terminate the service provider and retain a
successor?
7.
Do the written reports provide sufficient
information to adequately evaluate the
performance of the service provider compared
to benchmarks or industry standards?
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Monitoring Vendors
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If the responsibility to monitor a service
provider has been delegated, has the
individual or service provider to whom
the delegation has been made accepted
fiduciary responsibility in writing for the
monitoring?
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Summary
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A.
Have a clearly enunciated purpose/mission/set of
guidelines
B.
Always utilize qualified professional help
C.
Follow the basic fiduciary rules of prudence
D.
Follow applicable law
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Questions?
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All Rights Reserved.
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Quincy
Boston
Springfield
Crown Colony Plaza
300 Crown Colony Drive
Quincy, MA 02169
75 Federal Street
Suite 410
Boston, MA 02210
One Monarch Place
1414 Main Street 1310R
Suite 1310R
Springfield, MA 01144
Tel: (617) 479-5000
Fax: (617) 479-6469
Tel: (617) 479-5000
Fax: (617)338-1324
Tel: (888) 841-4850
Fax: (617) 479-6469
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