ULC

Management of Public Employee Retirement Systems Act Summary

More than $1 trillion in assets are managed in the United States in retirement systems for public employees of state and local government. A mixture of state law governs these systems, unlike private retirement systems which are governed primarily by federal law, the Employee Retirement Income Security Act (ERISA). State law has not kept up with modern investment practices so that trustees for these systems are very frequently not be able to maximize return for the level of risk that is appropriate to these systems. This means less money to pay retirement benefits than would be the case if trustees could use modern portfolio theory. (More on modern portfolio theory, later.)

In 1997 the Uniform Law Commissioners have promulgated the Uniform Management of Public Employee Retirement Systems Act (UMPERSA) to remedy the deficiency. It will provide legal rules that permit public employee retirement systems to invest their funds in the most productive and secure manner. And these advantages can be obtained with a minimum of regulatory interference. How does UMPERSA work?

ALL ASSETS HELD IN TRUST

Except for certain insurance-based assets, all assets of a retirement system are held in trust and the trustee has the independent, exclusive authority to invest and manage those assets. The trustee is defined as the person with the ultimate authority to manage a retirement system or to invest or manage its assets. By declaring that all retirement system assets are held in trust, UMPERSA assures that public employees are guaranteed the highest standard of conduct in the management and investment of assets for retirement that the law can establish. A trustee is the highest fiduciary, carries the greatest burdens of care, loyalty and utmost good faith for the beneficiaries to whom he or she is responsible.

As well as ordinary trustees’ powers, a trustee under UMPERSA has the power to establish an administrative budget and to employ the services necessary to administer the trust. The trustee may delegate functions that "a prudent trustee or administrator acting in like capacity and familiar with those matters could properly delegate under the circumstances." This delegation rule, which reverses the common law rule about delegation of trust functions, is important with respect to the trustee’s investment obligations.

PRUDENT INVESTMENT RULES

UMPERSA follows the Uniform Prudent Investor Act in its articulation of prudent investment rules. These rules provide trustees with the great advantage of modern portfolio theory. When the trustee is responsible for investment of the assets of a public employee retirement system, he or she must invest as a prudent investor invests his or her own assets. Prudent investment is a fiduciary duty. A prudent investor takes all factors into account in considering investment decisions, such as general economic conditions, effects of inflation or deflation, expected total return from income and appreciation of capital, and the role that every investment fills in the entire portfolio. There is a positive obligation to diversify investments, unless special circumstances indicate that it is not prudent to do so. Diversification is the best method for reducing risk of loss. In return for these obligations, the trustee obtains the power to invest in any property or investment consistent with UMPERSA.

Although a trustee under UMPERSA may invest in assets other than interest-bearing instruments and real estate, the prudent investment rules do not promote unreasonable risk-of-loss or speculative investment. The trustee must make a careful risk-return analysis in light of the objectives of the retirement system, including the income needs of that system. The availability of a broader range of investments and diversification means risk can be safely and significantly managed with the prospect of much greater return.

Since most of the public employee retirement systems are backed by state and local governments, if they fail to generate the income to pay retirement benefits, the taxpayer inevitably assumes the burden. Thus prudent investment reduces taxpayer risk, as well.

As a corollary to prudent investment obligations, the trustee’s performance in investment is measured by the performance of the entire portfolio, not just the performance of individual investments. Also, performance is measured in light of the facts and circumstances when investment decisions are made. Hindsight is ruled out.

TRUSTEE LIABILITY

A trustee or other fiduciary who breaches a duty imposed by UMPERSA is personally liable for any loss or for any profit made through use of trust assets. No agreement may exonerate a trustee or fiduciary from liability. The retirement system or the fiduciary may insure against such losses.

REQUIRED DISCLOSURES

UMPERSA requires each retirement system to provide three information resources. A "summary plan description" is required, as are subsequent updates when the system changes the plan. The summary plan description is a brief disclosure of the benefits the plan provides, how one qualifies for benefits, and how a member may become disqualified. Each system must publish "annual disclosure of financial and actuarial status" in detail. This is a comprehensive compilation of financial and actuarial information. And last, an "annual report" must be published. The "annual report" is a brief summary of the "annual disclosure of financial and actuarial status."

All three must be available at the retirement system’s principal offices for public inspection. The administrator must honor requests for copies, but may charge a reasonable fee for supplying them.

The administrator must send copies of the "summary plan description" to new participants in a retirement system within three months after they join. Updates must be sent out at least seven months after the fiscal year in which the plan changes have been made. A complete revised "summary plan description" with all prior changes incorporated must be sent to participants at least every five years. The "annual report" must be sent to participants within seven months of the end of the fiscal year which is reported.

UMPERSA contemplates the creation of an agency as a central repository of information on public employee retirement systems. Disclosures of the "summary plan description", subsequent changes, the"annual disclosure of financial and actuarial status" and the annual report must be filed with the designated agency.

ENFORCEMENT

A public employer, participant, beneficiary or fiduciary may bring equitable action in a court for relief from a violation of UMPERSA or breach of a duty. The agency may also bring injunctive relief against a violation of UMPERSA.

CONCLUSION

UMPERSA will provide for improved investment returns for public employee retirement systems. It will guarantee important information to public employers, trustees and participants about the administration of these systems. It provides clear liability and enforcement rules. State and local governments, trustees and fiduciaries, participants and the taxpayer, who must pay for financial deficiencies in such systems, all stand to gain from the adoption of UMPERSA. Every state should adopt it as soon as possible.