2005 saw the most widespread damage due to natural disasters in the history of the United States. Hurricanes Katrina and Rita devastated the Gulf Coast, displacing more than a million people and Hurricane Wilma plunged more than 6 million South Floridians into darkness for periods extending to nearly a month.
The human and economic toll on the economies of Louisiana, Mississippi, Texas and Florida was made painfully evident by daily news accounts. An unusual challenge emerged for retirement plans in the affected areas. Contributions could not be transmitted. Members no longer had homes or banks in which to receive benefits. Trustees and retirement staff responsible for asset management decisions and plan administration were scattered to other areas, many of them rendered homeless by the storm. Disaster planning, if any was even in place, proved inadequate. In light of the lessons from these natural disasters, a need for different thinking about plan management during periods of recovery has become an important fiduciary duty. The following are some of the issues to be considered in a disaster plan:
- Records – Are records secured from wind or water damage? Current technology for record imaging is not an option in areas prone to natural forces such as hurricanes, tornados, floods and earthquakes. The City of New Orleans stored nearly all of its real property records in a below sea level basement. It was able to save a majority by freeze drying the pages. Digital or DVD imaging would have prevented this problem. In advance of a storm, records could be downloaded and e-mailed to a remote address or secured in another facility. Most state public records laws now permit electronic storage of records eliminating the need for almost all paper documents.
- Asset management – All asset managers, consultants and custodians should be required as a matter of contract to submit a disaster recovery plan to the retirement fund. If the assets are managed or records maintained in a storm or other natural disaster prone area, it is vital to have a means of tracking assets, continuing the ability to trade, performance reporting, etc. This lesson came into sharp focus on Wall Street after September 11th.
- Paying retirees and other beneficiaries – A significant interruption in electricity poses a number of problems. Mail service was suspended in parts of the Gulf Coast and Florida for weeks after the various storms. Electronic payments were also unavailing as many participants use banks that had a single location which itself was seriously damaged or destroyed. While the Federal Reserve holds wire transfers where the end receiver is unable to accept the transfer, this nonetheless leaves the retirees in financial distress when they may need help the most. It is recommended that a specific plan be made with the primary custodial bank in the event of an emergency threatening the primary location. This can even include a plan to pay beneficiaries in cash if necessary. Reaching out to displaced retirees is also a priority. It is advisable to inform benefit payees of an emergency telephone number to use in the event of interruption of regular benefit distribution. Use of a website address is of no use in the event there is widespread loss of electricity. During Hurricane Wilma and its aftermath, there was no power for a distance of 250 miles of South Florida. Cellular phones did continue to function and could be charged in automobiles. Computer access, however, was virtually non-existent.
- Communications – All retirement plans are extremely dependent on computer driven communication. In the aftermath of September 11th and the hurricanes of 2005, the underlying telephone support technology failed. On-site file servers either had no electricity or the lacked the ability to support on-line services. Consideration should be given to locating file servers in a location less prone to weather-related issues or having a transfer arrangement in the event the on-site servers are down for an extended period. A number of South Florida funds found that natural gas driven generators provided a reliable source of electricity for up to two weeks. Those relying on diesel or gasoline driven generators shortly exhausted their fuel supplies. When power outages were widespread, there was no ability to pump replacement fuel and deliveries were frequently interrupted.
- Insurance – A bitter lesson learned in the Gulf Coast was that rising water is not a covered risk under most insurance policies. Many policies often have substantial deductions for wind-driven damage. In the absence of satisfactory commercial insurance, self-funding of a risk pool as part of the normal cost the retirement plan may proven more reliable. Additionally, retrofitting offices with shutters, impact glass, earthquake resistant buildings, generators, water proof storage capability, etc. is as important as insuring the confidentiality of member records.
In summary, the development of a meaningful disaster plan is a challenging task faced by a retirement plan. The lessons learned in the aftermath of 9-11, the California fires and earthquakes, and the Atlantic hurricanes demonstrates that these events aren’t something than only happen to someone else.