Investment Stewards, generally with the assistance of Investment Advisors, have primary responsibility for effective management of the investment process, including faithful adherence to investment fiduciary practices. The Investment Steward is responsible for managing the overall investment strategy: deciding on the asset allocation, defining the details of the strategy, implementing the strategy with appropriate Investment Managers, and monitoring the strategy on an ongoing basis. An Investment Advisor may be called upon by the Steward to assist in this process, or to assume direct responsibility for certain fiduciary duties delegated to, and accepted by, the Advisor.

Investment Stewards have different functions:

• Steward of a qualified or public retirement plan
• Steward of a foundation, endowment
• Steward of government funds

The Standard of Practice used to assess Investment Stewards is based on the Handbook: “Prudent Practices for Investment Stewards”, published by fi360. Each practice has been substantiated by legislation, case law, and/or regulatory opinion letters from ERISA, UPIA, UPMIFA, and MPERS.

Please click here to download Fiduciary Practices for Investment Stewards

Benefits of certification for Stewards:

1. Helps to establish evidence that the Steward is following a prudent investment process.

2. Potentially helps increase long-term investment performance by identifying appropriate procedures for:
• Diversifying the portfolio across multiple asset classes and peer groups
• Evaluating investment management fees and expenses
• Selecting Investment Managers
• Terminating Investment Managers that no longer are appropriate

3. Helps uncover investment and/or procedural risks not previously identified, which may assist in prioritizing investment management projects.

4. Encourages Stewards to compare their practices and procedures with those of their peers.

5. Assists in establishing benchmarks to measure the progress of the Steward.

Stewards of Qualified or Public Retirement Plans

The Employment Retirement and Income Security Act (ERISA) imposes on the Retirement Plan Sponsor, an obligation to act solely in the interests of participants and on those involved in managing the investment of plan assets an obligation to follow a prudent investment process. What does this mean?

A prudent investment process involves a number of practices including the following:

• Identifying who are the plan fiduciaries and obtaining their written acknowledgments

• Establishing quantitative and qualitative criteria for the selection and evaluation of investment options

• Establishing a written investment policy statement to govern the prudent practices to be followed, i.e. the business plan

• Conducting due diligence and documenting the process with respect to the selection of investment options and service providers

• Following applicable “safe harbor” provisions

• Conducting periodic and scheduled monitoring of investment performance, evaluating whether to change an investment option that falls short of selected criteria and documenting the process to provide a critical written record

• Conducting periodic and scheduled monitoring of investment expenses and service provider fees and disclosing the results to plan participants

• Ensuring best execution, appropriate use of “soft dollars” and proper voting of proxies

• Avoiding conflicts of interest and self-dealing.

These practices require that Stewards act as “prudent experts”, a standard demanding professional investment expertise. The CEFEX assessment provides a disciplined approach to ensuring all responsibilities are addressed. See the article: The Role of CEFEX Certification in Todays Retirement System, for more information on how the CEFEX assessment can help Investment Stewards.

In some cases, the firm wants to substantially delegate its fiduciary responsibilities to a full-scope independent fiduciary. CEFEX performs a certification of independent fiduciaries, thereby delivering the necessary oversight on behalf of the plan.

Mandating certification of Service Providers

Investment Stewards should mandate CEFEX certification of their service providers in order to ensure fiduciary diligence is prevalent throughout the investment environment. For retirement plans, the ERISA contains many sections which specify Investment Steward responsibilities for qualified plans. In each case, CEFEX certification delivers an effective means for providers to help Stewards meet these responsibilities:

• Investment Stewards should have a due diligence process for selecting investment options, and the process is consistently applied. (Per §402(c)(3); §403(a)(1) and (2); §404(a)(1)(B))

CEFEX-certification of an Investment Manager or Advisor verifies the existence of due diligence in selecting investment options, thereby forming an excellent basis for the oversight by a Steward. Through the certification process, the Investment Steward delegates this highly specialized task to a CEFEX Analyst, who is an investment expert.

• Investment Stewards must apply a documented due diligence process in selecting service providers. (Per §402(a)(1); §402(b)(2); §404(a)(1)(B))

When a Steward selects a CEFEX-certified firm, the Steward has intrinsically applied a due diligence process since the CEFEX firm has been rigorously assessed to documented diligence parameters. Fundamental due diligence screens for governance, and fiduciary practice, allow the Steward to focus on specific investment strategies and retirement plan features.

• Investment Stewards periodically review qualitative and/or organizational changes of investment decision-makers. (Per §3(38); §402(c)(3))

A CEFEX-certified firm is assessed on an annual basis, when both qualitative and/or organizational changes are reviewed to determine whether or not fiduciary practices are affected. The CEFEX-certified firm is obligated to report changes to its clients, and this is verified in the assessment process.

• Investment Stewards must verify that fees for investment management are consistent with agreements and with all applicable laws, and that fees are periodically compared to industry benchmarks. (Per §3(14)(B); §404(a)(1)(A),(B) and (D); §406(a))

Investment portfolios of CEFEX Investment Advisors are annually benchmarked against peer groups using the fi360 Analyzer. The CEFEX Analyst uses this tool to identify watch-listed investment options, including a screen for fees. Thresholds for watch-lists are established and the Advisor must explain significant deviations.

• Investment Stewards must periodically review agreements and contracts to ensure consistency with needs of the managed assets. (Per §3(14)(B); §3(38)(C); §402(c)(2); §403(a)(2); §404(a)(1); §408(b)(2))

The CEFEX assessment includes a detailed review of the Advisor’s Service Agreement to ensure compliance with regulation, specifically § 408(b)(2) and to ensure it is used for all clients. Since the certification is renewed annually, this periodic review helps the Investment Steward fulfill this obligation.

Conclusion

By hiring CEFEX-certified firms, the Investment Steward is greatly increasing the prudence by which it manages plan assets. This is a significant task. Investment Stewards must use this program, at a minimal cost to their plan, to increase the fiduciary excellence in overseeing the management of investors’ assets. The result is an increase in trust throughout the retirement system.

Community Foundations compete with other philanthropies for donor dollars. In an environment of increasing investment anxiety and questionable trust, such competition can be particularly fierce. CEFEX certification can help to overcome donor anxiety and mistrust by publicly demonstrating a foundation’s outstanding commitment to accountability, diligence and fiduciary process. Certification also enables a foundation to maximize investment performance and thereby maximize support of its donors.

CEFEX-certified foundations meet a standard of excellence established for Investment Stewards. The standard is represented by The Investment Steward Practices which are substantiated by legislation, including the Uniform Prudent Management of Institutional Funds Act (UPMIFA), case law and, where appropriate, regulatory opinion letters.

Within the Investment Steward Standard are practices requiring sound oversight and transparency of investment and spending policies. Oversight in the form of due diligence in the selection of asset managers and in monitoring their investment performance on an ongoing basis is an important fiduciary function. For most foundations with numerous endowed and non-endowed funds to oversee, this can involve dozens of managers.

The fiduciary burden is increased for community foundations that will engage a donor’s financial adviser to manage the donated assets. Institutionalizing the practice multiplies the burden. To mitigate fiduciary exposure, foundations should ensure that they have policies and resources adequate to meet the challenge of multiple managers. Further, they may require a donor’s adviser to submit to independent assessment in the form of CEFEX certification to verify that the adviser, as a manager of the foundation’s assets, conforms to a comprehensive standard of fiduciary practice. Indeed, foundations can require such certification of all of their asset managers.

Community foundations serve important philanthropic needs in the communities they serve. Access to continued donor support is crucial to their success. Being able to demonstrate their trustworthiness as stewards of donor assets is an integral part of maintaining that access. CEFEX Certification serves that purpose by verifying the foundation’s conformity with best practices and, where implemented, by verifying the conformity of its asset managers.

Stewards of Government Funds

Governments have a responsibility to oversee the mission, strategic direction, finances and operations of their respective organizations. They have an especially high commitment to fulfill these responsibilities honestly and with integrity. With respect to the treasury function, they must establish clear and understandable policies and ensure that they are followed.

Managers of governmental or public funds administer, direct, control, account for, report on, and monitor hundreds of billions of public dollars through governmental investment programs. This institutional environment is markedly different than for-profit sectors in that they must invest as well as borrow; maintaining long-term funds for social purposes such as housing programs, or maintaining short-term funds for governmental daily expenditures. An understanding of the dynamics of cash flow is vital for successful investments, as well as recognition of their fiduciary duties and responsibilities to the public.

Fiduciary duties and responsibilities such as setting investment objectives, developing and implementing an investment policy and investment committee, developing cash flows, performing broker/dealer and custodian due diligence, implementing internal controls, selecting, diversifying, and purchasing investment securities, recording and properly accounting for investments, monitoring the portfolio and evaluating and reporting the results are just a few of the fiduciary duties and responsibilities public investment managers have. A CEFEX-certified public fund demonstrates to the public that fiduciary procedures are in place and that investments are prudently managed.

Full-scope Independent Fiduciary

Recently, the role of the full-scope independent fiduciary, based on the definition contained within ERISA 3(21), has been promoted by well-respected professionals. This role assumes comprehensive fiduciary responsibilities on behalf of a Plan Sponsor.

The Plan Sponsor must select the Independent Fiduciary using fiduciary prudence, and therefore maintains a degree of responsibility and must review the performance of the Independent Fiduciary on a regular basis. The Independent Fiduciary assumes the remainder of the Investment Stewards responsibilities. This includes the selection of Investment Advisor, Investment Manager or ERISA 3(38) Fiduciary, and Recordkeeper, among other service providers.

CEFEX certification of the Independent Fiduciary as an Investment Steward serves as the required oversight by the Plan Sponsor. The annual assessment process includes all of the necessary elements that a Plan requires to be assured that the best fiduciary practices are in place. The CEFEX assessment includes the questions and evidence gathering from the Investment Steward assessment process.

For new Independent Fiduciaries, who do not have plan responsibilities yet, a review of practices and procedures is conducted to verify that the individual or firm is prepared to assume a Plan. Certification assessments will increase in length and detail by sampling the increasing number of plans for which the certified Independent Fiduciary serves.