Fiduciary Responsibility: Message Points for Pension Plans of Nonprofits 

    Published May 09, 2005


    Strategy: Pension Plans in the United States are under increasing strain because of the downturn in the stock market and under-funding issues. Legal liabilities and/or fraud in the nonprofit sector continue to rise. With this backdrop, CPAs have an opportunity to talk to the nonprofit community about fundamental steps they can take to mitigate risk and reduce liability by creating a sound fiduciary process.

    Media Audience: Nonprofits and foundations 

    Message Point: With the current stock market, downturn in the economy and under-funding issues involving pension plans, and increased competition for donated dollars, nonprofits more than ever need to turn to trusted independent advisors to help them understand their fiduciary responsibilities. As business advisors, CPAs encourage nonprofits to take five fundamental steps to manage liability and pension risk more effectively.

    Legal Background: A nonprofit board member that has the responsibility to invest money acts as a fiduciary. As a fiduciary, board members are required to know the law. Retirement plans are governed by the Employee Retirement Income Security Act (ERISA) and Uniform Management of Public Employee Retirement Systems Act (MPERS). Private trusts, foundations, and endowments are governed by the Uniform Prudent Investor Act (UPIA) and Uniform Management of Institutional Funds Act (UMIFA). Fiduciaries may also be subject to state laws.

    Below is a checklist to help nonprofit board members understand their investment-related fiduciary responsibilities:

    1. Have an Investment policy statement. All organizations that oversee investment portfolios should have a written investment policy statement. This statement assigns responsibilities and defines expectations for all the parties involved. It defines risk, time, liquidity, and tax parameters, and outlines unique needs and preferences of the organization. Any fiduciary with responsibilities where investments are concerned should get a copy of this document, review it, and ensure that it is being followed. Because this document is usually the first document that a regulator or a plaintiff's attorney will ask to see, it is important to adhere to the investment policy once it is created. To help you create an investment policy statement, consider hiring an outside expert such as a CPA/PFS trained in this area to assist you.

    2. Understand all fees and investment expenses. Nonprofits need to look at finders' fees, 12(b) (1) fees, and expense ratios and examine them very closely to see if they are reasonable. For example, investments might look good to the nonprofit but hidden expenses can eat away at the investment returns. To reduce legal liability, fiduciaries   need to completely understand what these expenses are in their investment portfolios.

    3. Diversity and periodically rebalance assets to manage risk. Rebalancing is inherent to the element of diversification, where the goal is to create a portfolio that balances appropriate levels of risk and return. That balance can only be maintained by periodically rebalancing the portfolio to maintain the appropriate diversification. The danger with lack of diversified assets is that the nonprofit may hold too many investments in one asset class that puts the investments at risk. Also, select the actual investment options that conform to the identified asset classes. As a fiduciary, you should periodically take a look at the portfolio statements to see if the investments as a whole are adequately diversified and in line with the investment policy.

    4. Use of investment advisers and other professionals. Legislation does not require fiduciaries to use outside professionals, but it is often highly prudent to do so. By outsourcing investment responsibilities, smaller organizations can be most efficient in focusing management and staff time on the organization's primary mission, while larger organizations can use a number of consultants and investment managers with varied investment styles to reduce portfolio risk and maximize returns. The investment policy should clarify which parties will be overseeing the investments, and define specific procedures to follow in selecting and working with outside professionals. Also, an annual audit should be included as part of a well-designed investment program.

    5. Understand conflicts of interest. One potential conflict is when a board member is also affiliated with a firm that provides investment services to the organization. While such a relationship is not necessarily improper, it is vital they be fully disclosed and discussed, and structured solely in the interests of the organization.

    Whether you are new to nonprofit board service or have extensive experience as a fiduciary, this checklist provides the basics to help you fulfill your investment-related responsibilities.

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