2. Essential Purpose and Vital Functions
Adapted from “Transforming the Dialogue: Fiduciary Essentials” by Frederick (Rick) Funston. Amazon, 2025
“Efforts and courage are not enough without purpose and direction.”
Understanding Pension Plans
When we talk about pensions, it might seem straightforward, but there are actually many different kinds. Each type has unique responsibilities, risks, and guarantees. Let’s quickly walk through the basics:
Public Pension Plans
Prudence doesn’t mean having all the answers; it means using a careful and systematic process to arrive at informed decisions. Prudence is judged by your method, not necessarily the outcome. Here’s how to be prudent:
Defined Benefit (DB): These offer guaranteed benefits based on salary and years of service (think teachers, police, and government workers).
Voluntary Savings (403(b)): Pre-tax contributions with employer matching, usually limited to annuities and mutual funds.
Deferred Compensation (457): Like a 401(k) but designed specifically for public employees with some flexible withdrawal rules.
College Savings (529): Helps families save tax-free for future education expenses.
Defined Contribution (DC): Employees and employers contribute, but the benefits depend on investment results (think 401(a) or 457 plans).
Private Pension Plans
Similar to public pensions but typically emphasize Defined Contribution (DC) due to cost and risk management.
Cash Balance Plans: A hybrid of DB and DC, providing a guaranteed growth rate.
Multi-Employer Plans (MEPs)
Jointly sponsored by multiple employers, usually in the same industry.
Individual Retirement Accounts (IRAs)
Personal savings vehicles (Traditional or Roth) offering tax advantages.
Federal Pension Plans
Special plans like Federal Employees Retirement System (FERS) or military pensions, offering defined benefits.
Taft-Hartley Plans vs. Public Retirement Systems: Similar but Different
While most of this handbook focuses on public retirement systems, we’ve seen increased interest from multi-employer (Taft-Hartley) plans. These two types of plans have more similarities than you might expect, along with a few notable differences:
Differences:
Similarities:
Both emphasize fiduciary responsibility, sustainability, diversified investing, and accountability to their members.
Both face funding challenges and must regularly report their financial health.
Understanding these similarities and differences can help trustees from both types of plans learn from each other.
Critical Questions Fiduciaries Should Ask:
Here are some vital questions to clarify your thinking—and your stakeholders’ understanding:
1. What's our essential purpose?
Your system exists to provide financial security for public employees when they retire. The core responsibility is creating, delivering, and protecting retirement benefits, keeping them separate from general government funds.
2. Why are public pensions so important?
For public workers: Many don’t have Social Security. Their pension may be their main or only income in retirement.
For public employers: Attractive pension benefits help attract and retain talented employees.
For local communities: Retirees spend their pension dollars locally, strengthening the economy
3. What is pension soundness?
A pension is sound when its assets can reliably meet long-term obligations (benefits and expenses). It depends on balanced contributions, good investment returns, and managing expenses well.
4. What drives contributions?
Actuarial assessments set contributions. The Expected Rate of Return (ERR) must realistically balance risk and return—too high, you risk shortfalls; too low, you place unnecessary pressure on employers and taxpayers.
5. What's contribution fairness?
Fairness is a tough balancing act. Trustees must balance current and future members, employers, and taxpayers, ensuring everyone contributes fairly and equitably.
6. What are the vital functions of a retirement system?
Vital functions include:
Collecting and managing contributions.
Investing assets prudently.
Accurately calculating and delivering benefits.
Ensuring compliance and managing risk.
Maintaining clear communication and transparency.
7. How do we monitor our effectiveness?
By regularly tracking key performance indicators—funding ratios, investment returns, administrative efficiency—you stay informed and proactive, assuring the system’s health.
Pension Soundness Simplified
Maintaining a sound pension means balancing this straightforward yet challenging equation:
Think of it like balancing a family budget—money in versus money out. Keeping this balance steady requires careful planning, regular monitoring, and adjustments over time.
Importance of the Actuarially Determined Contribution (ADC)
Consistently paying your ADC keeps your plan strong. Those systems that faithfully pay their ADC fare much better in the long run.
Why Public Pension Benefits Matter
DB plans: Provide guaranteed monthly payments based on salary and years of service. Employers manage investment risk and responsibility.
DC plans: Employees manage individual investment accounts, bearing all investment risks.
Defined Benefit (DB) vs. Defined Contribution (DC): Quick Comparison
Provide stable retirement income for millions of public employees.
Benefit payments boost local economies, creating jobs and supporting local businesses.
Many retirees depend entirely on their pensions (with no Social Security).
DB Plans Offer Better Cost Efficiency
DB plans typically provide retirement security at lower overall costs— around half that of DC plans due to economies of scale and professional investment management.
Governance Structures: One Size Fits One!
Public pension plans share common goals, but each system has its unique governance structure. Key dimensions include:
Governing jurisdiction (federal, state, local)
Plan sponsors (single vs. multiple employers)
Governance responsibilities (investment, administration, or both)
Breadth of services (pensions only vs. additional benefits)
Board composition and selection (appointed vs. elected members)
Board training and development (continuous learning)
Each system needs a structure tailored to its specific circumstances and stakeholder expectations.
Lessons from Canada: Can the U.S. Learn from Our Northern Neighbors?
The Canadian public pension system has made significant reforms that led to stronger funding and lower risk. Highlights of the Canadian approach:
Joint sponsorship between employers and employees.
More independent governance and strategic investments.
Lower assumed rates of return and higher contributions.
A cautious, long-term investment philosophy emphasizing internal management.
U.S. systems could learn from this model to enhance long-term sustainability and funding stability.
Lessons Learned: Purpose and Vital Functions
Here are some key takeaways:
Clearly understand your pension system’s purpose and communicate it effectively.
Balance contributions, returns, and benefits to keep your pension sound.
Ensure actuarially determined contributions (ADC) are paid to avoid long-term shortfalls.
Maintain fairness across generations, balancing current and future stakeholders.
Clearly define roles, board responsibilities, and training needs—one size doesn’t fit all.
Learn from successful models (like Canada’s), adapting ideas to strengthen your system.
Public pensions matter deeply to retirees, governments, and communities. Your careful stewardship ensures these vital systems remain secure for generations.
Understanding your system’s purpose and vital functions helps you confidently navigate the future!
Final Thoughts
Being a fiduciary isn't always easy or even appreciated—it requires courage, clarity, and commitment. It means making tough decisions, often without complete information, and being ready to adjust as circumstances change. However, done well, fiduciary governance has profound, positive impacts, safeguarding the financial futures of countless individuals.
Keep learning, ask good questions, collaborate openly, and stay adaptable. Your dedication can make a lasting difference— one decision at a time.
Want to learn more?
Board Smart subscribers, explore these resources:
Purpose and Vital Functions
The State of Public Pensions
DB vs. DC Retirement Plans
Governance Structures Explained
US vs. Canadian Pension Models
Contact rfunston@funstonadv.com or Slussow@boardsmart.com
Click here to order “Transforming the Dialogue: Fiduciary Essentials.”
