News: 2004 4th Quarter

• United Air Lines Pension Plans
  Several defined benefit plans of United Airlines hired IFS to act as Independent Fiduciary regarding funding and contribution matters. The U.S. Department of Labor was actively involved in finalizing the terms of our role as Independent Fiduciary.
• ARINC Pension Plan
  The defined benefit pension plan of this major airline communication firm hired IFS as an Independent Fiduciary to decide whether and on what terms to accept an excess contribution of the company's headquarters and to lease back the property to the company. IFS recently submitted a report to the U.S. Department of Labor in support of an ERISA prohibited transactions exemption to permit the contribution and leaseback.

IFS was engaged as Independent Fiduciary for the MCI 401(k) Salary Savings Plan (formerly the WorldCom 401k Savings Plan) regarding the partial settlement of a class action lawsuit. The suit alleged that certain Plan fiduciaries violated ERISA in connection with the Plan's holdings of securities issued by WorldCom Inc., the Plan's former sponsor. The settlement provided for combined payments exceeding $47 million by various defendants and their insurers. After deducting various costs, the net proceeds are payable to the Plan. IFS was engaged pursuant to a U.S. Department of Labor prohibited transaction exemption to (i) decide whether the Plan should approve the settlement and grant releases on behalf of the Plan to the settling defendants, some of whom are parties in interest to the Plan, and (ii) review and comment on the proposed plan for allocating the settlement proceeds to the members of the plaintiff class. After reviewing the litigation and proposed settlement with assistance of outside legal counsel, IFS determined the Plan should grant the releases. We also commented on the proposed plan of allocation which the parties accommodated in their submission of the allocation plan to the court.

TIFS was engaged as Independent Fiduciary for the Dynegy Inc. 401(k) Savings Plan regarding settlement of a class action lawsuit alleging that certain Plan fiduciaries violated ERISA in connection with the Plan's holdings of securities issued by Dynegy Inc., the Plan's sponsor. The settlement provides for payments totaling $30.75 million by various insurers. After deducting various costs, the net proceeds are payable to the Plan. IFS was engaged to (i) decide whether the Plan should approve the settlement and grant releases on behalf of the Plan to the settling defendants, some of whom are parties in interest to the Plan, and (ii) determine whether the settlement complies with an applicable U.S. Department of Labor prohibited transaction class exemption. After reviewing the litigation and the proposed settlement with assistance of outside legal counsel, IFS determined that the Plan should grant the releases and that the settlement complies with the class exemption.

Wells Fargo proposes to acquire a family of mutual funds sponsored by The Strong Financial Corporation. However, investors in the Strong funds are entitled to vote in favor or against the proposed merger. One of those investors is Strong's own pension plan. The named fiduciary of Strong's plan hired IFS as an Independent Fiduciary to evaluate, from the Plan's investment perspective whether to approve the merger of the Strong funds in which it invested and to direct the Plan's trustee whether to vote the Plan's proxy in favor of or against each merger. IFS completed that assignment in December.

IFS recently completed an evaluation of the Virginia Housing Development Authority department policies, procedures and workflows. The main focus was on the numerous aspects of the Authority's investment program, compared to best practices.

IFS was hired to impartially evaluate the interrelated functions and cross-ownership of various service providers to Ohio SERS-involving investment consulting, brokerage, investment management, risk management, custody and investment accounting-- and advise the Fund's board whether they create a material perceived or actual conflict of interest. We also provided advice regarding controls, policies and procedures that the board might adopt to prevent and/or mitigate the likelihood of conflicts.

IFS recently evaluated the organizational structure and staffing of the Treasury, compared to its peers across the country. The Treasury manages (among other things) the statewide pension fund. Our study also compared the level and structure of compensation the Treasury pays its investment staff.

IFS was engaged to assist the Board in finding a turnkey 401k service provider. The engagement included developing an RFP, critical analysis of responses, recommending proposed finalists and assisting in implementation of the conversion process.

…Independence and transparency was important to the Montana Board of Investments, which earlier this year launched a search for its first-ever outside consultant. The $9.6 billion system in September hired Independent Fiduciary Services to perform a one-time review of the system's operations. Montana expects its relationship with IFS to end after its review is finished; the system manages most of its assets in-house and has never had an ongoing investment consultant. But the chairman says the board still had some demands. "We wanted to make sure they were completely independent," says board Chairman Dick Anderson. "That was a really big consideration." With some of the firms that responded to the RFP, he says, "their whole thrust was just to sell us something down the road." Anderson says IFS, another independent consultant, did not give that impression, a fact that definitely played a role in the firm winning the job…

Independent Fiduciary Services received 3 Best in Class Awards from this recent independent survey. All around strength was singled out specifically by several of IFS's clients.

The New Jersey Division of Investment last week took its first step toward outside management of nearly $9 billion of the state's $66.4 billion pension fund. On Nov. 8, the state's investment council, chaired by Orin Kramer, approved a recommendation to begin an alternative investment program, targeting up to 13% of the fund's assets, or a total of about $8.6 billion, in three classes: real estate, private equity and absolute-return strategies or hedge funds….. The plan to diversify the state's pension fund stems from an operational review conducted last year by Independent Fiduciary Services Inc., Washington. It was released in September 2003 and included more than 20 recommendations to improve the portfolio's performance and the department's governance and structure. "One of the fundamental concerns that we had about the investment portfolio as we found it was that it was invested solely in publicly traded securities - no real estate, no private market assets of any description and no derivatives of any description," Samuel "Skip" Halpern, executive vice president of IFS, said in an interview. "From a diversification standpoint and from the standpoint of prudently taking advantage of opportunities in the market for enhanced return as well as better risk control, we thought the pre-existing portfolio was not well positioned," he said. The move into alternative investments is the beginning of a broader move to improve the fund's performance, but neither Mr. McCormac nor Mr. Kramer wanted to discuss the next phase in implementing the IFS recommendations.

ARINC Incorporated Retirement Income Plan was granted an individual exemption. The DOL issued a final exemption from certain prohibited transaction restrictions of ERISA permitting the in-kind contribution of property to the Plan by ARINC the plan sponsor. Independent Fiduciary Services was the Independent Fiduciary retained to represent the Plan in connection with the exemption request.

Independent Fiduciary Services, independent fiduciary for United Airlines, today filed a motion with U.S. Bankruptcy Court in Chicago seeking to collect at least $260 million in contributions and as much as $994 million from the airline on behalf of its pension plans, which total $6.9 billion. IFS asked the court to categorize the contributions UAL has refused to pay since July as "administrative expenses" so they have a high priority in the airline's Chapter 11 bankruptcy proceeding. Although the airline informed the court earlier this month that it wants to reject all of its collective bargaining agreements and terminate its defined benefit plans, IFS argued that United continued its pension plans and maintained its collective bargaining agreements in the first two years it was under bankruptcy protection. Thus, federal pension law requires United to honor the commitments it made to its employees, IFS maintained. "If the airline had ceased operations, fired its employees, rejected its bargaining agreements or terminated its pension plans on the petition date, United might not be obligated to make any further contribution at all," said Samuel W. Halpern, IFS executive vice president. "But that's not what United did; in fact, because it did precisely the opposite, the airline must now be prepared to follow through on its commitments," ….

"An independent fiduciary appointed to the United Airlines bankruptcy case is set to ask a US Bankruptcy Judge for permission to allow it to collect up to $1 billion in pending pension contributions".

Independent Fiduciary Services (IFS), which was appointed earlier this year as part of an agreement between United parent UAL and the US Department of Labor (DOL)…, will ask that the company's minimum pension funding requirements be designated as "administrative priority expenses" and released, Dow Jones reported. As per terms of its appointment, IFS was authorized to review the funding policy of the plans, assert claims (and) file lawsuits about the plans' funding and the company's contributions. "IFS has reviewed documents and conducted investigations contemplated by its agreement," according to documents expected to be filed with the court, Dow Jones reported. "Based on its investigation, IFS has determined that United has not only failed to pay mandatory (pension) contributions required by the Internal Revenue Service Code which came due (after the bankruptcy filing), but also those contributions directly attributable to the post-petition service of its employees."

Also see related stories in Washington Post, Business Section; Financial Times (London, England); AP; UPI; Chicago Tribune; Newsday; USA Today; New York Times - December 1, 2004; The National Law Journal (www.nlj.com) December 13, 2004

"Help wanted: More activism - Clients don't just want consultants to offer choices - they want to be told what to do"

Plan sponsors want consultants to play a bigger role in helping wring their targeted investment goals from a stingy market, ... Clients increasingly want their consultants to tell them what to do, rather than just offerin/g options... For now, consultants say demand for their services is strong across the board, although certain niches appear to be especially active. Samuel "Skip" Halpern, Executive Vice President of Independent Fiduciary Services, Washington, said his firm's operational reviews of pension plan investment programs and its work standing in as an independent fiduciary when a plan's regular fiduciaries are "conflicted out" are in high demand this year, and appear to be boosting IFS' mainline consulting business as well. For example, he said, in recent weeks a multibillion-dollar pension plan approached his firm, interested not only in its ability to provide traditional consulting advice but to advise on fiduciary responsibility, governance and process as well.

Roughly 100 New Jersey state workers marched on the State House last week to protest an administration plan to permit private financial experts to invest $9 billion from their pension fund, saying the plan was too risky, according to the Trentonian. (The plan is in response to the state-commissioned independent study of the agency by Independent Fiduciary Services, Inc. that contained ideas for reforms) State Treasurer John McCormac has proposed to allow about 13% of New Jersey pension fund money to be invested in hedge funds and venture capital, but a legal opinion requested by state senator Peter Inverso (at the request of state labor unions) takes issue with the delegation of investment decisions to an external manager. Last year the non-partisan Office of Legislative Services rendered an opinion stating the investment scheme crafted by then-Governor Jim McGreevey and State Treasurer John McCormac to hire outside managers to oversee investments related to the state's pension funds could not move forward. Prior to that, the Garden State was the only public pension fund in the nation completely staffed and invested by public employees.

Samuel W. Halpern and Andrew Irving authored a chapter on investment best practices which appears as the concluding chapter in the McGraw Hill book called Core-Satellite Portfolio Management - A Modern Approach for Professionally Managed funds. Copies are available from IFS, on request.

• Edward Patchett led a roundtable discussion on Hedge Fund Investing at the IFEBP Annual Employee Benefits Conference in New Orleans on December 2nd and 3rd. The session started with discussions on the investment objectives of most hedge funds and contrasted them with "traditional" investment management. They then discussed the differences between "absolute" and "relative" return investment objectives. Next the discussion focused on the legal structure and investment characteristics of hedge funds, the ERISA fiduciary status of hedge fund managers and the leverage, transparency and fee structure within this type of investment. Finally they discussed where might hedge funds fit within a plan's asset allocation.
• Gerald Carlisle participated in a presentation on Selecting and Monitoring Investment Managers. This presentation was given twice to audiences of several hundred participants.
• Steven Harding spoke on a panel on fiduciary responsibility to monitor public fund operations.

Samuel (Skip) Halpern spoke on "Fiduciary Audits-What to Expect", in October. This concerned how to conduct a fiduciary audit (or Operational Review); the wide range of investment, fiduciary, operational and governance subjects involved; the practical value of such a study; and examples of the numerous public and private funds that have completed them in recent years.