Governance of Public Employee Postretirement Benefits Systems

Type: 
Best Practice
Approved by GFOA's Executive Board: 
March 2010
Background: 

Public employee post-retirement benefit plans (e.g., retirement plans and other post employment benefits (OPEB) trusts) are typically established by state and/or local law and are governed by boards of trustees (boards, governing boards, trustees) that are subject to legal constraints. In addition to any duties set forth by statute, trustees of post-retirement benefit funds are bound by fiduciary duties, which can be divided into three categories:

  • Duty of loyalty – The obligation to act for the exclusive benefit of the plan participants and beneficiaries. The trustees must put the interest of all plan participants and beneficiaries above their own interests or those of any third parties. Regardless of their selection process, fiduciaries must be reminded that they do not represent a specific constituency or interest group.
  • Duty of care – The responsibility to administer the plan efficiently and properly. The duty of care includes consideration and monitoring of the financial sustainability of the plan design and funding practices.
  • Duty of prudence – The obligation to act prudently in exercising power or discretion over the interests that are the subject of the fiduciary relationship. The general standard is that a trustee should act in a way that a reasonable or prudent person acts in a similar situation or in the conduct of his or her own affairs.

Criteria for selection of most boards of public post-retirement benefit plans are normally set by state statute or other authority that establishes the plan. Governing fiduciaries set strategy and policy, determine decision-making authority, and delegate day-to-day management of the retirement system. Proper board structure and clarity of board roles and responsibilities that are consistently and fairly enforced promote good governance and provide legal protections for both plan fiduciaries and plan participants. Through prudent management, trustees, individually and collectively, must act in the best interest of all plan participants and beneficiaries.

Recommendation: 

GFOA recommends that sponsoring entities provide a clear, well-documented governance structure to guide governing bodies and plan administrators, as a good governance structure establishes the framework for effective plan administration. To administer an OPEB plan, sponsoring entities, governing bodies, and plan administrators should:

  1. Clearly delineate the governance responsibilities of fiduciaries and plan administrators in a comprehensive manual and the appropriate plan and trust documents.
  2. Keep plan documents current and ensure that they reflect the substantive plan (see Governmental Accounting Standards Board Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions). Administrative decisions and interpretations that accumulate over time should be formally documented and incorporated in any plan summaries and, when appropriate, in the plan document; doing so will help avoid legal issues regarding variations between the substantive plan and the official plan documents.
  3. Provide participants with a summary plan description, a document that describes plan benefits and the plan’s significant features (see the GFOA best practice, Preparing an Effective Summary Plan Description). Conduct periodic educational sessions to review the summary plan description and answer participant questions (see the GFOA best practice, Communicating Health-Care Benefits to Employees and Retirees). Plan summaries and other documents can be construed as legally binding, so the plan sponsor, governing body, legal counsel, and administrative staff should review them carefully to avoid conferring rights and benefits that the plan sponsor did not intend and that are not included in the official plan documents.
  4. Maintain all participant and beneficiary records necessary for administration of the plan, in accordance with state and local privacy laws:
    1. Participant and beneficiary names.
    2. Demographic information on each participant and beneficiary.
    3. Dates such as hire dates, for computing vesting, and birth dates, for determining Medicare eligibility.
    4. Any other information needed for actuarial valuations or required by the plan document.
  5. Maintain any information necessary for legal and tax compliance (e.g., labor contracts, Internal Revenue Service determination letters). 
  6. Develop and maintain a comprehensive policy and procedures manual, and distribute updates on a timely basis. The manual should include:
    1. Current plan documents, Internal Revenue Service determinations, and administrative interpretations and decisions.
    2. Policies, guidelines, and procedures regarding governance; administration; accounting, budgeting and financial reporting; and legal compliance and reporting.
    3. Policies and procedures for the professional and technical training of fiduciaries and administrative management and staff, particularly in the areas of governance and fiduciary duties and responsibilities; plan compliance and legal issues; and best practices in OPEB plan administration and all relevant areas of responsibility.
  7. Hire an actuary to perform periodic valuations and to value the financial impact if any changes in the plan or to trust funding are proposed. The responsibility for appointing an actuary can rest with the plan sponsor, trust governing body, or the plan administrator.
  8. Implement procedures to keep administrative costs as low as possible:
    1. Periodically review contractual services and purchases to make sure the product and services being purchased are priced optimally (see the GFOA best practice, Strategic Health-Care Plan Design).
    2. Consider combining administrative activities with other departments or entities to lower administrative costs, and review this possibility periodically.
Committee: 
Retirement and Benefits Administration
References: 
  • An Elected Official’s Guide to Public Retirement Plans, GFOA, 1997.
  • An Elected Official’s Guide to Defined Benefit and Defined Contribution Retirement Plans, GFOA, 1999.
  • National Association of State Retirement Administrators (NASRA) Resolution 1999-06 - Code of Ethics.
  • Statements of Key Investment Risks and Common Practices to Address Those Risks, Association of Public Pension Fund Auditors, 2000.
  • Operational Risks of Defined Benefit and Related Plans and Controls to Mitigate those Risks, Association of Public Pension Fund Auditors, 2003.
  • International City County Management Association Code of Ethics, 2004.
  • GFOA Best Practice, Ensuring OPEB Sustainability, 2007
  • GFOA Best Practice, Design Elements of Defined Benefit Pension Plans, 2008.
  • GFOA Best Practice, Public Employee Retirement System Investments, 2009.
  • Governance Manual, Public Employees’ Retirement Association of Colorado.
  • Best Practices for Trustees and Pension Systems, American Federation of State County and Municipal Employees (AFSCME), available at www.afscme.org/issues/27459.cfm.