Fiduciary Duty and the Wisconsin Retirement Boards R ob Weber R ob Weber DETF Chief Counsel DETF Chief Counsel (608) (608)

Who is a Fiduciary? l Persons named as trustees, plus others depending upon: l Discretionary authority or control over administration of plan or Trust assets. l The functions performed.

Who are the fiduciaries here? l ETF Board members are named as Trustees. l SWIB members have discretionary authority over investments. l WR and TR Boards functions include hearings disability annuity appeals, approving settlements of those appeals and approving administrative rules.

5 Basic Fiduciary Duties l l Loyalty l l Protect the Trust assets l l Impartiality l l Prudence l l Respect the specific terms and purpose of the Trust

Duty of Loyalty l A Trustee must administer the Trust solely in the interests of the beneficiaries.

Bristol Hotel example l Salmon leased Bristol Hotel for 20 years. l Meinhard put up money for conversion. l Agreed how to apportion losses and share profits. l All improvements will revert to landowner. l Salmon manages and operates the building. l Near end of lease, landowner offers Salmon a deal. l Involves new lease and development of Bristol site and surrounding sites. l Salmon negotiates the new lease and deal for his own corporation.

Conflicts of Interest l Will probably arise from time to time. l Avoid them if you can. l Not always possible, because you’re always wearing your “trustee hat.” l Disclose conflicts, get out of room, and don’t vote. l Seek legal opinion, if necessary. l Be aware of state ethics laws.

Who isn’t owed the Duty of Loyalty? l Sub-groups of the beneficiaries. l Employers. l Authorities appointing Trustees. l Legislature & other elected officials. l Taxpayers.

Protect the Trust l l The trustee owes beneficiary a duty to use reasonable care and skill to preserve the trust property. l l Must take reasonable steps to assert and collect on claims held by Trust. l l Must defend against all actions that might result in loss to the Trust estate, unless unreasonable.

Duty of Impartiality l l When there are two or more beneficiaries of a trust, the trustee is under a duty to deal impartially with them. l l The terms of the trust may grant the trustee discretion to favor one or more beneficiaries over others. The trustee may not abuse such discretion.

Duty of Impartiality (Illustration) l A trust is established to provide income to Adam, then pass to Bob. l During his lifetime, Adam will receive income from the trust. l At Adam’s death, the trust fund goes to Bob, or Bob’s children if Bob is dead. l The Trustee invests the Trust in ways that maximize trust income rather than growth.

Duty of Prudence l l In administering the Trust, the trustee owes the beneficiary a duty to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property. l l If trustee has, or procures, his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence, he is under a duty to exercise that greater skill.

Duty of Prudence l l Duty Not To Delegate. A trustee has a duty to personally perform the responsibilities of the trusteeship.

Duty of Prudence l l Duty Not To Delegate; Exception: Delegation is permitted if a prudent person might delegate those responsibilities to others. But Trustee remains under fiduciary duty to beneficiaries: l l Deciding whether, to whom and in what manner to delegate authority. l l Supervising agents to whom authority was delegated. l l Must act as a prudent person would act in similar circumstances.

Respect the Trust Terms l Duty to act in accord with a good-faith interpretation of the laws governing the trust.

School District School District TSA case l District offers tax sheltered annuity plan to employees. l Money is withheld from employees’ biweekly paychecks. l That money is deposited into account earning daily returns. l At end of month, all the withheld money is forwarded to TSA carriers.

Overpaid retiree case l Retired teacher accidentally paid double checks for over 10 years ($100,900). l No willingness to repay. l Board’s attorney advises withholding future payments until repaid. l 3 members of Board block resolution to start the withholding.

Trustee Liability Sed quis custodiet ipsos Custodes? [Who will guard the guards themselves?] Satires -- Decimus Junius Juvenalis (c. 50 – c. 130)

Co-Fiduciary Liability l l Duty With Respect To Co-Trustees If there are several trustees, each is under a duty to the beneficiaries to participate in the administration of the trust and to use reasonable care to prevent a co-trustee from committing a breach of trust, and if necessary to compel a co-trustee to redress a breach of trust. Restatement (3d) of the Law of Trusts, § 184

Lawsuits Against Trustees of Public Employee Trust Fund l Sovereign immunity. l Procedural technicalities. l Time limits for commencing action. l Attorney fees and costs. l Dollar limit on remedy. l Indemnification.

To do list: l Put in prep time. l Learn laws, policies and regulations. l Know what’s been delegated, why and to whom. l Ask questions. l Build consistent and fair processes. l Respect confidentiality of information. l Keep eye on agents; don’t assume.