You asked whether any state has adopted Employees Retirement Income Security Act of 1974 (ERISA) pension fund mismanagement protections. You also asked for a comparison of the ERISA provisions that are designed to protect private-sector employees from pension plan mismanagement with state law provisions designed to protect public pension plans from mismanagement by the state treasurer.

SUMMARY

State and local governments are exempt from ERISA. We contacted the National Association of State Retirement Administrators, the Employee Benefits Research Institute, the National Conference on Public Employee Retirement Systems, and the State and Local Pension Exchange website. These sources were unaware of any state that had directly adopted ERISA provisions. However, because ERISA and state law protections both stem from common law fiduciary and trust principles, many public pension protections are similar to those found in ERISA.

The rules described in this summary are explained in detail below. We simplified the ERISA rules for this report because particular conditions or exemptions apply to most of them. Some ERISA rules are not explained because they are not relevant in comparing ERISA and state mismanagement protections (e.g., rules concerning investment in employer-owned real property or securities and corporate control contests).

The public pension funds that this report refers to and that the treasurer oversees include the Connecticut Municipal Employees' Retirement Fund (A and B); the Soldiers', Sailors', and Marines' Fund; the State's Attorney Retirement Fund; the Teachers' Annuity Fund; the Teachers' Pension Fund; the Teachers' Survivorship and Dependency Fund; the School Fund; the State Employees Retirement Fund; and the Hospital Insurance Fund.

ERISA and state provisions concerning fiduciary standards of care and investment duties are similar. State law contains more rules, but ERISA-covered fiduciaries are subject to common law fiduciary rules and may therefore be subject to the rules found in the Connecticut statute, but not expressed in ERISA.

ERISA defines a fiduciary as anyone who exercises discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so. Plan fiduciaries include, for example, plan trustees, administrators, and members of a plan's investment committee.

State law provides oversight to the treasurer's investment decisions through an advisory board. ERISA does not require plan oversight, but subjects fiduciaries to lawsuits from interested parties, plan beneficiaries, and the federal government under certain circumstances.

ERISA identifies many more prohibited fiduciary transactions than state law. State law places few explicit limitations on the treasurer's investment ability. However, it limits her investment ability by stating affirmatively the transactions in which she may engage.

ERISA prohibits many transactions between a plan and a party in interest. A party in interest may include:

1. any fiduciary, including an administrator, officer, trustee, or custodian, counsel, or plan employee;

2. a person providing services to the plan, such as an attorney;

3. an employer of covered employees;

4. a union whose members are covered;

5. owners of employers or employee organizations;

6. relatives of a party in interest; or

7. individuals or corporations with an ownership or employment relationship with a party in interest.

It also sets many more specific rules than state law does about loans to and by plans and provision of goods, services, and facilities to the plan.

Finally, ERISA places extensive reporting requirements on private-sector employers. State law requires the Advisory Committee to annually report to the governor, General Assembly, and plan beneficiaries on public pension security investments.

For your further information, we have attached a copy of the Uniform Management of Public Employee Retirement Systems Act that the National Conference of Commissioners of Uniform State Laws recently approved and an OLR summary of the Act. The Act may be found at www.law.upenn.edu/bll/ulc/fnact99/1990s/umpers97.htm. The OLR summary is available at www.cgalites.state.ct.us/p599/rpt/olr/htm/99-r-0769.htm.

COMPARISON OF ERISA AND STATE PROTECTIONS

Fiduciary Standards of Care

ERISA ERISA imposes the rules listed below on pension plan fiduciaries. In addition to these rules a fiduciary must meet common law fiduciary standards of care. 1. Exclusive Purpose Rule. The fiduciary must act (1) solely in the interest of participants and beneficiaries and (2) exclusively to provide benefits to participants and beneficiaries and to defray reasonable plan administrative costs (29 U.S.C.A. §1104(a)(1)(A)). 2. Prudent Man Rule. Fiduciaries must act with the care, skill, prudence, and diligence, under the circumstances prevailing at the time, that a prudent man acting in a like capacity and familiar with such matters would use in conducting an enterprise of a like character with like aims (29 U.S.C.A. §1104(a)(1)(B)). 3. Diversification Rule. Fiduciaries must diversify plan investments to minimize the risk of large losses, unless, under the particular circumstances, it is clearly not prudent to do so (29 U.S.C.A. §1104(a)(1)(C)). 4. Acting in Accordance with Plan Documents Rule. Fiduciaries must act in accordance with the documents and instruments governing the plan to the extent that those documents and instruments are consistent with ERISA provisions (29 U.S.C.A. §1104(a)(1)(D)).

STATE Connecticut Uniform Prudent Investor Act (CUPIA). State law requires the treasurer to comply with the Connecticut Uniform Prudent Investor Act (CGS §§ 45a-541 to 541l) when making most types of investments (CGA § 3-13(a)). Under the CUPIA, the treasurer must follow the following rules. 1. Prudent investor rule. The treasurer must invest and manage pension fund assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In doing so she must exercise reasonable care, skill, and caution. Her decisions about individual assets must be evaluated in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust. Whether the treasurer complies with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a particular decision (CGS § 45a-541h). 2. Factors treasurer must consider when investing. While managing pension funds the treasurer must consider (a) general economic conditions; (b) the possible effect of inflation or deflation; (c) the expected tax consequences of investment decisions, strategies, and distributions; (d) the role that each investment or course of action plays within the overall trust portfolio; (e) the expected total return from income and the appreciation of capital; (f) needs for liquidity, for regularity of income, and for preservation or appreciation of capital; (g) an asset's special relationship or special value, if any, to the purpose of the trust or to one ore more beneficiaries; (h) the portfolio size; and (i) the trust's nature and estimated duration (CGS § 45a-541b(c)). 3. Verification of facts. The treasurer must take reasonable steps to verify facts relevant to the investment and management of trust assets (CGS § 45a-541b(d)). 4. Asset Diversification. The treasurer must diversify the investments of the pension funds unless she reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying (CGS § 45a-541c). 5. Initial Asset Review. The treasurer must review the trust assets within a reasonable time after accepting responsibility for the pension fund (CGS § 45a-541d). 6. Loyalty. The treasurer must invest and manage the pension funds solely in the interest of the beneficiaries (CGS § 45a-541e). 7. Impartiality. The treasurer must act impartially in investing and managing funds, taking into account any differing interests of the beneficiaries (CGS § 45a-541f). 8. Investment costs. The treasurer may only incur costs while investing and managing funds that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the treasurer (CGS § 45a-541g). 9. Delegating investment and management functions. The treasurer may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. She must exercise reasonable care, skill, and caution in: (a) selecting an agent, (b) establishing the scope and terms of the delegation consistent with the purposes and terms of the trust, and (c) periodically reviewing the agent's action in order to monitor his performance and compliance with the scope and terms of the delegation (CGS § 45a-541i). Investing CHE Funds. With regard to the Connecticut Higher Education (CHE) Trust Fund, state law requires the treasurer to invest trust deposit amounts in a reasonable and appropriate manner to achieve the objectives of the trust, exercising the discretion and care of a prudent person in similar circumstances with similar objectives. Acting in Accordance with Plan Documents. The treasurer must invest CHE funds in a manner consistent with the objectives of the trust.

Oversight of Fiduciary

ERISA No similar provisions, but under certain circumstances pension participants and beneficiaries may sue a fiduciary. In addition, employers may not deduct pension-associated costs from their federal income tax liability if they do not administer their plans in accordance with ERISA.

STATE State law requires a statutorily created Investment Advisory Council to review all investments that the treasurer makes and to recommend investment policies. The governor may direct the treasurer to change any investments she makes when the advisory council advises him that doing so is in the state's best interest (CGA § 3-13b).

Prohibited Transactions

ERISA ERISA bars fiduciaries from engaging in certain types of transactions. It outlaws a wide variety of transactions between a plan and a party in interest and between a plan and a fiduciary. It bars fiduciaries from entering into prohibited transactions or causing or allowing a plan to enter into such transactions regardless of their motives for doing so. The U.S. labor secretary may grant administrative variances and exemptions from these rules. A fiduciary who breaches these rules is personally liable and must pay any losses the plan incurs resulting from his breach and give back any profits he has made through the use of plan assets. In addition, the IRS may impose penalty taxes on him. Transactions between a plan and a party in interest. ERISA bars a wide variety of transactions between a plan and a party in interest (29 U.S.C.A § 1106(a)(1)). A fiduciary must not allow or cause the plan to engage in any transaction if he knows, or has reason to know, that the transaction is a direct or indirect: 1. sale, exchange, or leasing of any property between the plan and a party in interest, 2. monetary loan or credit extension between the plan and a party in interest; 3. furnishing of goods, services, or facilities between the plan and a party in interest; 4. transfer to a party in interest or an action that will result in the use of or benefit by a party in interest of any plan asset; or 5. acquisition on behalf of the plan of any employer security or employer real property in violation of the provisions of the act that establish limitations on the amount of employee securities and employer real property that may be acquired by benefit plans. Transactions between a plan and a fiduciary. A fiduciary may not engage in self-dealing or enter into any transaction with respect to a plan from which he personally profits (29 U.S.C.A. §1106(b)). More specifically, ERISA bars him from: 1. handling plan assets for his own interest or account; 2. acting in any capacity in any transaction involving the plan on behalf of a party whose interests are adverse to the plan's interests, participants or beneficiaries; and 3. receiving any consideration for his own personal account from any party dealing with an employee benefit plan in connection with a transaction involving plan assets. ERISA exempts the following from the above two rules: 1. certain loans to participants and beneficiaries; 2. reasonable arrangements with parties in interest for office space and for legal, accounting, or other services needed for the establishment or operation of the plan; 3. certain loans to employee stock ownership plans; 4. certain plan investments in bank deposits or in similar financial institutions whose employees are covered by the plans; 5. certain contracts for insurance between a plan and an employer maintaining the plan or a party in interest; 6. the provision of ancillary bank services to a plan by a bank or similar financial institution that is a plan fiduciary; 7. the exercise by a plan of a privilege to convert securities; 8. various transactions between a plan and certain common or collective trust funds or pooled investment funds; 9. distribution of plan assets in accordance with the terms of the plan and ERISA requirements; 10. transactions required or permitted in accordance with the provisions covering employer withdrawals from multi- employer plans; and 11. mergers of multi-employer plans, or transfers of assets or liabilities between these plans, where such transactions the Pension Benefit Guaranty Corporation determines, meet ERISA requirements.

STATE Common Stock Limitation. State law bars the treasurer from investing more than 55% of a trust fund's value in common stock (CGS § 3-13d(a)). Investment in Iran Limitation. The treasurer may not invest state funds in any corporation doing any form of business in Iran that could be considered to be contrary to U.S. national interests or foreign policy (CGS § 3-13g). Investment in Northern Ireland Limitation. The treasurer may not invest state funds in corporations doing business in Northern Ireland that have not adopted the MacBride principals (explained in statute) (CGS _ 3-13h). Investment in State Obligations. The Treasurer may not directly invest CHE funds in state or local government obligations or in any treasurer-supervised investment or fund. Securities Dealer Limitation. The treasurer may not invest or reinvest in the sale or acquisition of securities or obligations with a securities dealer or bank acting as a securities dealer unless it is included in the list of primary dealers, effective at the time of such agreement, as prepared by the Federal Reserve Bank of New York.

Authorized Transactions

ERISA No similar provisions.

STATE State law specifies the types of investments and deposits that the treasurer may engage in. It allows her to: 1. invest in real estate investment trusts (REITs) (GGS § 3-13d(a)); 2. invest in real estate mortgages that Connecticut savings banks may invest in (CGS § 45a-203(a)); 3. invest in or reinvest in any bonds (including those in coupon form), stocks, specifically including shares of any open-end or closed-end mutual funds, other securities, or other kinds of property or types of investments; 4. enter into repurchase agreements under certain circumstances (GGS § 3-13d(a)); 5. lend securities from funds under certain circumstances (GGS § 3-13d(a)); 6. sell call options (GGS § 3-13d(a)); 7. invest in mortgage pass-through certificates (CGS § 3-13d(b)); 8. enter into certain contracts with a life insurance company authorized to do business in Connecticut (CGS § 3-13d(d)); 9. provide loans to mortgage lenders subject to certain conditions (CGS § 3-13e(b)); 10. deposit any funds she manages in any national banking association, state bank, trust company or state bank and trust company in New Jersey, Rhode Island, New York, Massachusetts, or Pennsylvania that is a member of the Federal Reserve System and whose net worth is at least $50 million (She may not deposit an amount that is greater than 30% of the net value of the institution.); 11. sell Short Term Participation Investment Fund participation certificates to the trust funds she administers subject to rules and conditions that she establishes (CGS §3-27a); 12. invest pension funds in Short Term Investment Fund participation certificates (CGS § 3-27f); 13. purchase Medium-Term Investment Fund participation units for pension funds; 14. invest and reinvest pension funds in U.S. government or agency obligations, shares, or interests in an investment company or investment trust registered under the Investment Company Act of 1940, repurchase agreements fully collateralized by such obligations, U.S. postal service obligations, certificates of deposit, commercial paper, savings accounts, and bank acceptances (CGS § 3-31a); and 15. invest all or part of a sinking fund in any bonds in which savings banks may legally invest.

Investment Duties

ERISA Fiduciaries are responsible for meeting the duties listed below. 1. Prudent Investor Rule Compliance. Under the common law, to comply with the prudent investor rule, a fiduciary must procure a reasonable income while avoiding undue investment risks. Under ERISA regulations, the fiduciary satisfies the prudent investor rule if he makes an investment after giving "appropriate consideration" to facts and circumstances he knows or should know are relevant to a particular investment (29 C.F.R. § 2550.404a). Appropriate consideration includes a fiduciary's determination that a particular investment or investment course of action is reasonably designed as part of the plan portfolio to further the plan's purposes. He must consider the risk of loss and the opportunity for gain associated with the investment. Investment Diversification. Fiduciaries must diversify plan assets to minimize the risk of large losses unless, under the circumstances, it is clearly prudent not to diversify. Since a prudent fiduciary must consider all the facts and circumstances relevant to his case, the degree of investment concentration that violates diversification requirements is not stated in terms of a fixed percentage. Among the factors a fiduciary must consider in determining the extent to which diversification is required are the purposes of the plan; the amount of assets; financial and industrial conditions; the type of investment (bonds, stocks, mortgages, etc.); distribution of investments as to geographical location and industries; and maturity dates. Social Investment Policies Rules. ERISA does not state whether fiduciaries violate their duty if they consider social policy when they make investment decisions. The U.S. Labor Department has issued its opinion on the topic. It requires a fiduciary to first determine that excluding a category of investment for social purposes (e.g., not investing in alcohol or tobacco companies) would not reduce the amount of return or raise the risk of the plan's investment portfolio. If the decision does neither, the fiduciary may exclude the category of investment for social purposes (Letter from Dennis M. Kass, Assistant Secretary of Labor to Senator Howard M. Metzenbaum, 5/27/86). Use of Expert Advice. Fiduciaries are not required to be experts in all matters, such as insurance contracts. If a matter concerns special skills not normally possessed by lay people, fiduciaries must obtain expert advice to assist them in making investment decisions and carefully consider the advice before making any commitment of plan assets. Securities Investments. ERISA does not set specific limitations on the amount or percentage of plan assets that a fiduciary may invest in securities, except for the amount of employer securities that a plan may hold or acquire. However, the diversification rule restricts the amount of plan assets that may be invested in securities. In addition, the prohibited transaction rules restrict the purposes for which investments in securities can be made.

STATE Amount Invested. State law requires the treasurer to invest as much of the state's trust funds as are not needed for current disbursements (CGS § 3-13d(a)). Social Investment Policies Rules. State law allows the treasurer to consider social, economic, and environmental factors when choosing stock investments (CGS § 3-13d(a)). CHE Requirements. With regard to the CHE fund, state law requires the treasurer to give due consideration to the rate of return, risk, term or maturity; diversification of the total portfolio within the trust; liquidity; the projected disbursements and expenditures; and the expected payments, deposits, contributions and gifts to be received.

Loans To And By Plans

ERISA ERISA places a number of restrictions on plans in terms of to whom they may extend loans and from whom they may accept loans. Loans extended as a plan investment must be made prudently and in the interest of and for the exclusive benefit of the plan's participants and beneficiaries. A plan cannot accept loans that violate ERISA's rules that prohibit transactions between plans and parties in interest. ERISA and U.S. DOL rulings provide exemptions to this rule. ERISA's prohibition against direct or indirect loans or credit extensions between a plan and a party in interest outlaw a variety of transactions that are tantamount to loans or credit extensions. These include a plan's: 1. guaranteeing of a loan to a plan by a party in interest; 2. acquiring a debt instrument which is an obligation of a party in interest; and 3. funding a plan with employer contributions that are his own debt obligations. The fiduciary cannot use his authority to cause a plan to make a loan to an entity in which he has an interest. Although there is no statutory or regulatory authority for limiting the percentage of the pension that is invested in loans, the U.S. DOL seems to be placing a 25% cap on the total value of the plan that may be invested in loans. Other factors that are considered in determining whether a loan investment is valid is whether the fiduciary is self-dealing, the amount of plan assets tied up in a loan, the rate of interest charged, the adequacy of security or collateral, the creditworthiness of the borrowers, whether the trustees have taken steps to oversee and maintain the loans, the availability of alternative investments and courses of action for the plan. ERISA provides exemptions from most of its prohibited transaction rules if the loan is made to a plan that qualifies as an employee stock ownership plan (ESOP). Another exemption is provided for certain residential mortgage loans.

STATE State law allows the treasurer to make loans to mortgage lenders subject to certain conditions (CGS § 3-13e(b)), The treasurer may lend securities from funds under certain circumstances (GGS § 3-13d(a)), The treasurer may receive loans on behalf of the state subject to the governor's approval (CGS § 3-16).

Provisions of Goods, Services, and Facilities By And To Plans

ERISA ERISA broadly prohibits transactions between a plan and a party in interest for the provision of goods, services, or facilities. This prohibition outlaws, for example, providing personal living quarters to a party in interest by a plan. This prohibition is comprehensive. It applies to everything from office space, equipment, and supplies to legal, accounting, investment advisory, and computer services. ERISA and certain U.S. DOL rulings provide broad exemptions from these rules to allow parties in interest to meet plan operational needs. ERISA also prohibits a plan fiduciary from causing a plan to engage in a transaction if he knows or should know that the transaction is a direct or indirect sale, exchange, or leasing of any property between the plan and a party in interest.

STATE No similar provisions.

Liability for Breach of Fiduciary Duties

ERISA Fiduciaries and co-fiduciaries who fail to meet ERISA's requirements may be found personally liable for breaching their fiduciary duties. Personal liability attaches to a fiduciary if he breaches any of the responsibilities, obligations, or duties imposed on him by ERISA. Liability may also exist under traditional trust law. In addition, fiduciaries who engage in ERISA prohibited transactions may be subject to excise taxes. Fiduciaries are not responsible for breaches occurring before or after their term. However if a fiduciary knows of a breach committed by a predecessor, he is obligated to remedy it. Failure to do so constitutes a separate breach.

STATE No similar provisions.

Record Keeping and Reporting

ERISA Every employer (or the plan administrator) who maintains pension, annuity, stock bonus, profit-sharing, or other funded, deferred compensation plans must file an annual return with IRS giving information about the plan's qualification, financial condition, and operations. In addition to the reporting and disclosure obligations imposed by its tax provisions, ERISA subjects plan administrators and others to numerous requirements relating to maintaining of plan records, reporting plan information to government agencies (the U.S. DOL and the Pension Benefits Guaranty Corporation (PBGC)), and disclosing plan information to participants and beneficiaries. Both civil and criminal penalties may apply in the event of violation of the non-tax record keeping, reporting, or disclosure rules. All individuals required by ERISA to file reports, certifications, and descriptions must keep records sufficiently detailed to provide the necessary, basic information and data from which the reports can be verified, explained, classified, and checked for accuracy and completeness. The records, including vouchers, worksheets, receipts, and applicable resolutions, must be kept for six years after the documents to which they relate are filed or would have been filed but for an exemption or simplified reporting requirement. Unless its plan is a multi-employer plan, an employer must maintain records with respect to each of its employees sufficient to determine the benefits due, or that may become due, to the employee and to supply the records to the plan administrator. In the case of multi-employer plans, the employer is required to furnish the plan administrator with the information necessary to allow him to maintain the records. U.S. DOL Reporting. The following information must be reported annually to the U.S. DOL: 1. a plan description, including a summary; 2. a statement of any material modification in the terms of the plan or any change in the information included in the plan description, 3. an annual report; 4. terminal and supplementary reports; 5. a notice of any amendment that may retroactively reduce accrued benefits; 6. upon the secretary's request, any documents relating to the plan, including a bargaining agreement, trust agreement, contract, or other instrument under which the plan is established or operated; and 7. any additional information or data that the DOL deems necessary to carry out ERISA's purpose. Plan documents filed with the DOL are available for public inspection. Pension Benefit Guaranty Corporation Reporting. Plan administrators must file a variety of reports with the PBGC. Specifically, they must file: 1. a notice of reportable events; 2. an annual report; 3. a notice of intent to terminate the plan on a proposed date; 4. a notice of withdrawal of a substantial employer; 5. a notice of a terminating plan's inability to pay basic benefits on time; 6. a notice of a final distribution of plan assets; 7. copies of terminal and supplementary reports filed with the U.S. DOL; and 8. any other reports that the PBGC requires in carrying out its duties involved in plan terminations. Disclosure to Participants and Beneficiaries. The plan administrator must disclose certain material, including reports, statements, and documents, to participants and beneficiaries. The disclosure takes three forms. The administrator must: 1. automatically furnish certain material, including a summary plan description, to each participant covered under the plan and to each beneficiary who is receiving benefits; 2. furnish certain material to individual participants and beneficiaries upon their request; and 3. make certain material available to participants and beneficiaries for inspection at reasonable times and places. In addition, ERISA's fiduciary standards require the fiduciary to provide participants and beneficiaries with a comprehensive explanation of the plan's contents.

STATE The Advisory Board must annually report to the governor, the General Assembly, and beneficiaries on the pension's security investments. The treasurer must report annually by October 15 to the governor and the CHE Trust Advisory Committee on the CHE fund operation, including receipts, disbursements, assets, investments, liabilities, and administrative costs.

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