Fulfilling Your Fiduciary Duty as a Trustee or Board Member

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Fulfilling Your Fiduciary Duty as a Trustee or Board Member

If you serve as a trustee or a committee or board member for a non-profit organization, you may bear more responsibility than you bargained for. Legally, you could be defined as a fiduciary and held to the highest legal and ethical standards for the property entrusted to your care. In fact, you could be held personally liable for your decisions.

Chances are the term “fiduciary” rings a bell but bears little real meaning. If so, you’re not alone. The Center for Fiduciary Studies estimates that, although many are wholly unaware of their legal responsibilities, more than 5 million people serve in a fiduciary role and account for the management of more than 80% of the investable assets in the United States.

If you ask a professional to define “fiduciary,” they will likely tell you there is no clear-cut industry standard.

The Center for Fiduciary Studies defines a fiduciary as anyone who has the legal responsibility for managing property for the benefit of another, exercises discretionary authority or control over assets, and acts in a professional capacity of trust rendering comprehensive and continuous investment advice.

Using this definition, the term becomes surprisingly inclusive. Investment advisors as well as members of trusts, endowments, charities, foundations and retirement plan investment committees may qualify as fiduciaries.

Amongst the confusion, three pieces of legislation guide the definition of who qualifies as a fiduciary and what is required of such persons.

The Employee Retirement Income Security Act of 1974 (ERISA) set out to stop the corporate pension plans from defaulting. ERISA significantly raised the responsibility of investment committee members for 401(k) plans and other qualified retirement plans by holding committee members personally liable for losses to the funds due to negligent investment practice.

Under ERISA, plan fiduciaries are charged to act solely in the interest of the plan participants. Employee benefit plan managers cannot discharge their fiduciary duty by simply enlisting the services of a third-party administrator, but the advisor must act as a “prudent expert.” Further, investment committee members of employee pensions plans are required to periodically monitor the service provider’s proper performance and prudent handling of investments.

The Uniform Management of Public Retirement Systems Act of 1994 (UMPERSA) granted similar protections to public employee plan participants. UMPERSA describes the trustee as “the highest fiduciary, [who] carries the greatest burdens of care, loyalty, and utmost good faith for the beneficiaries to whom he or she is responsible.”

For trustees of private foundations and endowments, the Uniform Prudent Investors Act of 1994 (UPIA) goes on to spell out specific investment practices for fiduciaries.

UPIA requires investment committee members to diversify investments across the asset classes and achieve a payout which corresponds to assumed risk. Further, fiduciaries are required to evaluate the appropriateness of each individual investment based on its overall impact on the portfolio as a whole. Although no investments are off the table, the fiduciaries must determine the suitability of each investment based on its overall impact on the portfolio.

When it comes to managing the property of another, fiduciaries are responsible for more than investment returns. While investment returns are one measure of performance, it is the investment policy which determines whether you have fulfilled your fiduciary responsibility. In other words, it is not how many points you scored in the game but how well you executed your game plan.

Establishing the game plan and executing the play are the keys to fulfilling fiduciary responsibility. Drawing on ERISA, UMPERSA, and UPIA legislation, the Center for Fiduciary Studies has outlined a series of best practice standards for all fiduciaries, known as the “Uniform Fiduciary Standards of Care.” To be sure you are fulfilling your fiduciary duty, you should:

  1. Know standards, laws and trust provisions.
  2. Diversify assets to specific risk/return profile.
  3. Prepare investment policy statement.
  4. Use “prudent experts” and document due diligence.
  5. Control and account for investment expenses.
  6. Monitor the activities of “prudent experts.”
  7. Avoid conflicts of interest and prohibited transactions.

If you have sought the help of outside investment advisors and administrators, it is important to note that both parties shoulder a fiduciary duty. Even though the third-party investment advisor assumes the responsibility for the investment decisions, the committee still has the duty to monitor the practice and performance of such managers. In addition to ongoing performance evaluation, some suggest you have third party investment advisor contracts re-bid every three years.

When selecting a third-party investment advisor, be sure to exercise a process of due diligence. Consider the performance of the advisor, track record, total expenses, assets under management, and performance reporting standards of the advisor. In addition to those standards, we recommend that all investment advisors report time-weighted portfolio performance compliant with the Association for Investment Management and Research (AIMR) standards.

More information on fiduciary roles and prudent investment practices can be obtained from The Center for Fiduciary Studies at www.fi360.com.

The original version of this article was published May 1, 2006. Photo used here under Flickr Creative Commons.

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Beth Nedelisky is part of the Investment Committee at Marotta Wealth Management and specializes in trust and endowment management. Born in Africa, raised in Europe and married in the USA, Beth understands world markets first hand.