Simply put, fiduciary duty is the legal obligation to act in the best interest of another party. Its legal defensibility keeps fiduciaries acting in another’s best interest, and gives the beneficiary or client recourse if they don’t. At Colorado PERA, every employee and each trustee is a fiduciary for all PERA members and retirees.
The origins of fiduciary duty date back to English Common Law of the middle ages. Society has long recognized the need to delegate management of certain affairs to someone better qualified, but also that giving up control brings new risks. A clearly delineated fiduciary duty eases the mind of the beneficiary and alerts people acting as fiduciaries to their legal responsibilities. While a court would look at facts surrounding a relationship in order to determine whether the relationship is a fiduciary one, over time, legal consensus has grown as to when a fiduciary relationship exists.
Those with a fiduciary duty to a client or beneficiary could range from a lawyer or stockbroker to a realtor or even a doctor, teacher or priest under certain circumstances. Banks, pension and retirement plan administrators, conservators, trustees and executors certainly have fiduciary responsibilities and Colorado PERA is no exception. A fiduciary must act solely in the interest of his or her client and “perform with a high level of competence and thoroughness, in accordance with industry standards.” Any client or beneficiary is entitled to loyalty and care from their fiduciary.
There are three basic fiduciary principles for PERA fiduciaries, including both employees and trustees:
- A duty of loyalty. Fiduciaries have a responsibility to act solely in the best interest of PERA members and retirees. Fiduciaries must not have conflicts of interest and must disclose relationships that could potentially cause a conflict and recuse themselves from decisions that could be seen as favoring one individual or group over another. While PERA fiduciaries are responsible to individual members and retirees, they also have a responsibility to all members and retirees collectively.
- A duty of care. Also referred to as a duty of procedure, fiduciaries have an obligation to follow clear processes in order to make decisions and act responsibly on behalf of members and retirees. The duty of procedure focuses on the process of making decisions rather than only on the results. Meeting a strict requirement to diversify its investments so as to minimize the risk of large losses of assets is one example of a PERA procedure that meets this fiduciary duty.
- A duty of prudence. Fiduciaries make a commitment to arm themselves with the best information and knowledge available in order to make responsible decisions. Neither employees nor board members can claim ignorance as a justified reason for making poor decisions, even if their intentions were good. Instead, PERA fiduciaries must ask questions about the complex responsibilities of managing a large retirement fund if easy answers are not available at first glance. They then have an obligation to seek out information and resources in order to make prudent decisions.
Both PERA employees and trustees receive regular training on what it means to be a fiduciary and the legal and ethical standards behind their roles. While all positions are bound by the same fiduciary responsibilities, the nature of their work affects different trustees and employees in different ways.
PERA’s investment-related activities are clearly covered by fiduciary laws and guidelines, but so are administrative, benefit and management responsibilities. Everything from selecting service providers to preparing reports documenting financial investments and management controls to even working to recover funds from poorly managed corporations and promoting strong corporate governance fall under the duties to members and retirees as fiduciaries of PERA.
As Colorado law makes clear, PERA fiduciaries have a responsibility to “carry out their functions solely in the interest of members and benefit recipients and for the exclusive purpose of providing benefits” (C.R.S. 24-51-207(2)(a)).
PERA takes the responsibility seriously, preparing its employees and trustees and giving them the tools to act as fiduciaries as well as giving PERA members and retirees the peace of mind that their retirement is in reliable hands.