2 Reviewing Pension Plan Investments Prepared by Heather Hesik US Department of Labor, Pension and Welfare Benefits Administration
3 Pension Plan Investments Should Be Prudent and Diversified These are very common sense requirements.
4 Is the risk involved worth the potential gains? For prudence, ask:What is the risk involved, and what would be lost in a worst-case scenario?Is the risk involved worth the potential gains?What, if anything, can be done to mitigate the risks?
5 For diversification, remember: “don’t put all your eggs in one basket”.If all or most of the Plan’s assets are in one investment (or one type of investment), what would happen if that investment goes bad?
6 The bottom line: make sure the investment choices are smart choices The bottom line: make sure the investment choices are smart choices. How do you determine if the investment choices made are smart choices?
7 First, look at what was done by the fiduciaries when the decision was made. Did the fiduciaries review prospectuses and other materials about the investment, and did they understand these materials?If they are not investment experts, did they consult with any experts?For tangible property investments, did they inspect the property?Did they get an appraisal done to make sure the investment was worth at least the purchase price?Did they properly analyze the risk involved, and compare with the asset allocation and liquidity needs of the Plan?
8 Next, what do the fiduciaries do to determine that the investment continues to be appropriate for the Plan?Do they receive and review periodic reports on the investment?If yes, is there anything in the reports that should raise concerns?Do the fiduciaries do anything about these concerns?Do they properly appraise investments at least once a year?Do they periodically review the Plan’s portfolio and reevaluate the Plan’s changing liquidity needs?Do they compare the investment’s performance with appropriate benchmarks? What do they do if the investment is not performing as well as the benchmark?
10 Loan Underwriting Procedures No credit check done on borrowersNo securityNo appraisal or title search done on the property securing the loanHigh loan to value ratioInterest rates significantly lower than those charged by commercial lendersInterest-only payments, with a balloon payment at the end of the loanLoans in default with no collection action taken on behalf of the Plan.
11 Farm landIssue was spotted when the Plan reported on the Annual Report that almost all its assets were invested in real estate.During the interview, the fiduciaries admitted they did not have property appraised when purchased.When the Plan first bought the property, there were fruit trees on the property that were old and no longer producing enough fruit to make a profit (a fact that would have been known if they had had an appraisal done). Therefore, the trees had to be removed, and new trees planted.
12 Farm land, cont.The land was planted with plum trees, which take on average seven years to reach full maturity. Therefore, the property did not make a profit the first seven years that the Plan owned it.After the purchase of the property, the other Plan assets had to be liquidated in order to pay the expenses of planting, growing and harvesting the fruit. The Plan eventually ran out of money and had to borrow money in order to pay benefits and to pay maintenance costs of the property. The Plan has spent a net total of over $1 million to operate the fruit farms.
13 Investment Pyramid scheme Investment manager created a Pyramid scheme to defraud pension plans of their money. What were marketed as secured notes were in fact only secured by “servicing fees”, and in the end, the only reason notes were being paid were because additional plans were investing in these notes. DOL alleges that the Plan fiduciaries should have known it was a scam and not invested plan money.Investment manager told the Plan fiduciaries the investment was extremely low risk, yet with a very high rate of return. Plan fiduciaries did not undertake any investigation to determine whether these claims were true.
14 Investment Pyramid scheme, cont. Plan fiduciaries did not really understand what the investment was, but instead of asking for advice, they assumed it was a good investment.Plan fiduciaries claim they intended the investment to be short-term, but they failed to notice that on the investment reports they received from the manager that the investments had maturity dates that were continually extended into the future.Plan fiduciaries also claim they did not realize the notes had no real security, but the disclosure information provided to them did disclose the nature of the security.