1. The Trustee’s Role as a Fiduciary: Duty To Your Investment Portfolio Mike Marsh, CFA Consultant | Manager, Investment Research Ryan Pickert Consultant | Client Development

2. Today’s Objectives
Who is a Fiduciary?
General Investment Governance
Status, Requirements and Limitations of Being a Fiduciary

3. Who is DeMarche? Independent Institutional Investment Advisor
Advisory and Discretionary Services
Clients include major corporations, retirement funds, endowments, foundations and public funds
100% privately owned
45 years of experience

4. Global Fiduciary Precepts
If an Investment Steward were to read all of the laws defining fiduciary obligations, the Steward would discover seven common requirements, which have been adopted in the fiduciary community as “Global Fiduciary Precepts.”
Know standards, laws, and trust provisions
Diversify assets to optimize risk/return profile
Prepare detailed investment policy statement
Use “prudent experts” (for example, an Investment Manager) and document due diligence
Control and account for investment expenses (have a robust fee review process)
Monitor the activities of “prudent experts”
Avoid prohibited transactions and avoid or manage other conflicts of interest in favor of the portfolio

5. Who is a fiduciary? A fiduciary is a person who:
Is the “named fiduciary” (a formal designation by the plan)
Exercises discretion with respect to management or administration of the plan (Trustee, Administrator)
Provides investment advice for a fee (Investment Consultant)
Exercise discretion with respect to the management or disposition of plan assets, (Money Manager)
Functional test focused on actual control and authority over plan

6. Who is a fiduciary?
Activities that give rise to fiduciary status include:
Being a plan sponsor
Appointing other plan fiduciaries
Selecting and monitoring plan investment options
Selecting and monitoring third party service providers
Interpreting plan provisions
Exercising discretion in denying or approving benefit claims
Providing investment advice for a fee (limited exception for general education advice or use of qualified investment advisor)
Activities that are purely administrative in nature do not give rise to fiduciary status.

7. Investment Governance
Roles & Responsibilities of Trustees
Set broad investment policies/objectives for portfolios
State law adopted in 1993 requires all Texas public retirement systems to adopt a written investment policy
Identify rate of return
Identify and evaluate risk
Review policies annually, including asset allocation targets, if applicable
Targets should be reviewed on the basis that these are long-term targets, and as such should include consideration of previously approved long-term risk/return objectives
Adopt ethical standards and conflict-of-interest policies
Develop a funding policy
Education
Empower others to manage day-to-day operations

8. Investment Governance
Roles & Responsibilities (continued)
Investment Consultant
Develop and maintain investment policies
Portfolio construction (e.g. asset allocation, diversification, style)
Selection of investment managers
Due diligence on investment managers
Performance reporting on investment managers
Investment Managers
Delegated discretion to construct portfolios within areas of expertise
Manage assets in accordance with policy guidelines

9. Investment Governance
Investment Policy
Specifies the procedures, guidelines, and constraints for decision making and management
Road map that keeps organizations on path to achieving long-term goals
Encourages disciplined process that improves chances of success
Provides clarity to individual managers on guidelines for implementing their strategies

10. Investment Governance
Investment Policy (cont.)
Factors to consider
Time Horizon
Liquidity
Transparency
Downside risk aversion
Restrictions (prohibited transactions)
Starting point matters

11. Why does a starting point matter?

12. Investment Governance
Risk Evaluation
Risk is prevalent across investment spectrum
Organizations should identify and prioritize key risks and metrics to quantify tolerances; consistent with ability to financially, politically, and publicly withstand downside risk
Investment policy must represent ability to withstand:
Risk of loss – financially, politically, and publicly
Risk of shortfall to required return

13. Limitation of Fiduciary Status
How does a fiduciary mitigate his/her scope of fiduciary function?
Delegate – Appoint investment manager
Plan design
Hire experts to educate and advise
How does a fiduciary terminate his/her role?
Must follow plan procedures
Must make sure a successor fiduciary is in place
You are a fiduciary until you appropriately resign or are removed and there is a successor

14. General Fiduciary Requirements
ERISA Section 404(a)(1) - A plan fiduciary has the following affirmative duties (“The Five Duties of a Fiduciary”):
Duty of Loyalty – to act solely in the interest of participants and with the exclusive purpose of providing benefits to them
Duty of Documentation – a written IPS must comply with the provisions of the plan to the extent consistent with ERISA
Duty of Prudence (i.e., duty of care or “prudent-person rule”)*
Duty of Diversification – to diversify the assets of the plan to minimize the risk of large losses
Duty to pay only Reasonable plan expenses
A plan fiduciary is also subject to a set of express prohibitions
*The prudent-person rule (also known as the "prudent man rule") is a legal maxim restricting the discretion allowed in managing a client's account to the types of investments that a prudent person seeking reasonable income and preservation of capital might buy for his or her own portfolio.

15. ERISA versus Non-ERISA
The Employee Retirement Income Security Act of (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans
Must follow ERISA's reporting requirements
Non-ERISA
Governmental plans are exempt from ERISA coverage
Must follow the financial measurement and reporting requirements imposed by the Governmental Accounting Standards Board

16. Duty of Loyalty
Act solely in the interest of participants and beneficiaries with the exclusive purpose of providing benefits to participants and beneficiaries
Avoid self-dealing or preferring interests of third- parties over participants and/or beneficiaries
Don’t mislead participants and/or beneficiaries
Vigorously pursue rights of participants and/or beneficiaries

17. Duty of Documentation
Discharge duties in accordance with the documents and instruments governing the plan
Documents include: plan document, summary plan description, trust agreement, investment management agreements, and investment policies
As a Committee member, read and make sure you understand plan documents and ensure your decisions are consistent with them

18. Duty of Prudence “Prudent Expert” Rule
Discharge duties with the care, skill, prudence, and diligence that a prudent person acting in a like capacity would use in like circumstances
Prudent Expert Rule focuses on conduct
Doctrine of “Procedural Prudence” (means process > outcome). Courts emphasize fiduciary’s conduct, investigative diligence, and acting consistently with the purpose of the plan over results. Fiduciaries need not guarantee success of decision, but rather show that it acted prudently in making the decision

19. Duty of Diversification
Minimize risk of large losses by diversification unless, under the circumstances, it is clearly prudent not to do so
The following factors should be taken into consideration:
Purpose of the plan, Amount of the plan assets, Type of investment, Geographic distribution, Distribution as to industries, Maturity date
All plan assets and not any particular sub-fund
Limited relief through plan design

20. Duty to Pay “Reasonable” Plan Expenses
Plan assets may be used for two purposes:
To pay benefits
To pay reasonable expenses of administering the plan
Prudent-person rule requires that fiduciaries identify fees and ensure they are “reasonable”
Review all service provider fees for reasonableness

21. Prohibited Transactions
Fiduciary is precluded from causing a plan to engage in a transaction which constitutes a direct or indirect
Sale, exchange, or leasing, of any property between plan and “parties in interest” (PIN)
Lending of money or other extension of credit between plan and PIN
Furnishing of goods, services or facilities between plan and PIN
Transfer to, or use by or for the benefit of, PIN, of any assets of plan, or
Acquisition, on or behalf of plan, of any employer security or employer real property in violation of ERISA § 407(a)
“Parties in interest” include, among others:
Any plan fiduciary (including, but not limited to, any administrator, officer, trustee or custodian), counsel or employee of plan; a person providing services to plan; an employer any of whose employees are covered by plan; or an employee organization any of whose members are covered by plan

22. Prohibited Transactions
In addition, a plan fiduciary may not:
Deal with the assets of the plan in his or her own interest or for his own account
Act in any transaction involving the plan on behalf of a party whose interests are adverse to the interests of the plan or to the plan participants and beneficiaries
Receive any consideration for his or her own personal account from any party dealing with the plan in a transaction involving the assets of the plan

23. Recap and Call to Action
Understand your fiduciary responsibilities as a trustee
Develop an investment policy
Follow established policies and procedures
Partner with industry experts

24. Commitment to Clients and Education
DeMarche is committed to exceeding client expectations through our leadership in research and education.
Programs in Finance and Investments
DeMarche hosts workshops across the country each year for institutional investors. These free programs feature our consultants, together with top investment experts, for discussions of critical investment topics, market forces and industry trends.
Customized Workshops and Seminars
We develop and tailor educational sessions to meet the needs and requests of our clients. These can cover a wide range of topics including fiduciary responsibility, emerging asset classes and new investment policy strategies.
Reports and Analysis
Capital Market Review
Economic Outlook
DeMarche Dashboard
Client-directed Research
Initiatives
Annual Client Conference
Our annual two-day client conference is held each fall. Now in its 36th year, the conference features timely discussions by leading investment professionals, academics and DeMarche consultants on issues that impact investment strategies and portfolio returns.
Speakers Bureau
We provide our industry experts to speak at national conferences and regional workshops on topics relevant to institutional investors and financial executives.