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Fund Groups Mull Trustee Benefits


While at least one fund group has recently announced it would expand its trustees' retirement plan, most fund groups have put their board retirement plans out to pasture.

Board retirement plans typically pay the independent trustees who retire from board service a percentage of the compensation they previously earned. Payments are made over a specified number of future years.

By law, boards set their own compensation levels, including the paying of retirement benefits. Retirement benefits are paid from the funds themselves for which the trustees provided oversight.

Shareholders don't have to approve directors' compensation structures. But directors' pay, as well as the details and benefits of any retirement plan, must be disclosed in a fund's Statement of Additional Information and in shareholder proxies where trustees are being elected.

Most funds require trustees to have served a minimum number of years on the board before they become eligible for benefits. And most won't dole out any benefits if trustees retire before the stipulated normal retirement age.

In many cases, trustee retirement plans allow payments to continue for the rest of a trustee's life. And in a few cases, even if the retired trustee dies, a designated beneficiary is entitled to continue receiving reduced benefits.

The Benefits of Benefits

These retirement perks are often used to attract and retain qualified fund directors, say industry executives. "It behooves the investor to have quality trustees, and attracting qualified candidates to serve as trustees in a large fund complex may require those fund complexes to offer such incentives as retirement plans," said John Lively, assistant general counsel of AIM Management.

Last month, AIM announced it would consolidate its core funds' board of directors with the board of the former GT Global Funds, which AIM acquired in 1998. AIM will expand its fund trustees' retirement plan to include the two trustees shifting over from the former GT Global funds' board.

While the cost of expanding a board's retirement plan can be a concern to some fund groups, the AIM board determined that the revised retirement plan "would not materially increase the (funds') expenses," the June 25 AIM shareholder proxy filing noted.

The costs associated with paying retirement benefits have largely dictated that larger fund complexes have the lion's share of the industry's retirement plans for trustees.

According to Management Practice of Stamford, Conn., which provides research and consulting to fund board trustees, only 6% of all fund groups have any retirement plan currently in effect. However, 42% of the largest fund groups--those with $25 billion or more in assets--provide retirement benefits to their independent trustees.

"For the big fund groups, the cost is not terribly significant. But it is terribly significant to smaller fund groups," said Meyrick Payne, managing partner of Management Practice.

The process of paying compensation to fund trustees for several years after they've vacated their board room chairs can be difficult to explain to fund shareholders, industry experts agree. "A director performs the services now, not in the future," Payne added.

The Disappearing Act

The number of trustee retirement plans has decreased, according to Management Practice. In 1999, roughly 8% of all fund complexes, and 47% of the largest fund complexes, offered retirement benefits to trustees, according to the firm.

Consolidation within the fund industry may be a contributing factor to this decrease. But increasingly, fund boards are taking their cue from corporate America's move to rid corporate directors of retirement benefits and are purging their own retirement plans for their trustees, said Payne.

John Hancock Funds of Boston has no retirement plan for trustees. But it offers a deferred compensation plan that, much like a 401(k) plan, allows trustees to postpone taking money until after board retirement. "We agree it's important to retain good trustees," said a company spokesperson. "But we feel like this is the better choice for us and our shareholders."

A decade-old trustee deferred compensation plan, which gave the illusion of being a retirement plan, was terminated four or five years ago by the American Express Funds' board, said Les Ogg, counsel to the group's independent trustees. The plan allowed trustees to defer up to half of their annual compensation to be paid to them after retirement from the board. But the plan was nixed because it became challenging to explain to shareholders why a director was paid for 10 years after ceasing to provide service, he said.

In addition, "this created the perception that (trustees) will be continued on the board until full benefit of the plan was vested, regardless of how well the director performed the duties," Ogg added. But he noted that the American Express board in general is not opposed to pension plans for trustees.

The American Express Funds' board is not alone in choosing to terminate its plan. This past October, the board of Lord Abbett & Co. of Jersey City, N.J. terminated the retirement plan for seven of its trustees. In its place the board pays an additional $25,000 per year which trustees must defer receipt of, according to Lipper, Inc.

This past February Deutsche Asset Management of New York amended its trustees' retirement plan so that no future benefits would accrue. A one-time benefit payment was substituted, according to Lipper.

In May, the board of the reconstituted JP Morgan Funds, which now includes the renamed Chase Vista Funds, terminated the prior Chase funds' board plan (JP Morgan had no retirement plan for its trustees) with a $10.95 million one-time payment to all trustees. Additionally, JP Morgan paid a one-time retirement benefit of $225,000 to each of its original trustees who chose to retire after the merger.