Pension plan trustees need to be more wary of the advice they get from pension consultants. That's according to new studies and guidance from the Securities and Exchange Commission and the U.S. Department of Labor, which also recommended that companies ask more questions to expose consultants' conflicted interests.
The SEC studied the business practices of 24 firms that provide pension consulting firms and found a variety of ways in which pension consultants operate under conflicting interests, fail to fully disclose those conflicts, and even rationalize they are not subject to liability rules governing pension plans.
SEC’s Office of Compliance Inspections and Examinations recently published its study findings (see box at right), followed closely by joint SEC-DOL advice for employee benefit plan administrators on how to fully assess whether pension consultants are operating in compliance with federal rules.
Pension plans are governed in part by the Employee Retirement Income Security Act, which requires that fiduciaries—anyone entrusted to manage plan assets—do so in the best interests of participants and beneficiaries. Plan administrators often rely on pension consultants, third-party administrators and other professionals to assist them in managing plan assets.
Wirtshafter
According to John Wirtshafter, an attorney with McDonald Hopkins in Cleveland who focuses on compensation and benefit matters, fiduciary liability extends to investment advisors, pension consultants and other who influence the management of plan assets. “Investment advisors are fiduciaries under ERISA,” Wirtshafter said. “They are absolutely required to provide advice that is in the best interests of plan participants and beneficiaries.”
Many pension consulting firms provide advice to benefit plan administrators while they also have relationships with money managers, which raises concern about potential conflicts of interest—whether consultants recommend funds that are in the best interest of plan participants and beneficiaries, or whether they’re somehow compensated by money managers for recommending the funds.
The relationships themselves aren’t illegal or in question, but pension rules require that they be fully disclosed to plan administrators so they can take those relations into account when assessing consultants’ recommendations.
“The SEC is saying in many cases those relationships aren’t being fully disclosed, or aren’t being disclosed at all,” Wirtshafter said.
Not Insulated
In its study, the SEC found more than half the firms it reviewed provided services to both pension plan administrators as well as money managers and mutual funds; in addition, more than half have broker-dealer relationships that involve some measure of unclear or undisclosed commission sharing. The report details a number of other conflicting interests that it says in many cases are undisclosed or not clearly or fully disclosed.
Even further, the SEC study said many of the pension consultants it studied did not consider themselves fiduciaries, so they were either unaware of or ignoring their obligations. “Many pension consultants believe they have taken appropriate actions to insulate themselves from being considered a ‘fiduciary’ under ERISA,” SEC wrote.
In its guidance following the study, SEC and DOL provide administrators a list of 10 questions they should ask their pension consultants to help expose any undisclosed conflicts, as well as a summary with each question explaining why the question is important and what its answer might reveal.
The SEC’s examination of pension consultants likely is a result of a variety of factors.
Morhun
Michael Morhun, national director of actuarial services for RSM McGladrey Retirement Resources, says recent concerns about 401(k) plans likely helped turn attention to defined benefit plans as well. “This is an overflow of what’s happening in 401(k) plans,” he said. “The SEC is looking to define for defined benefit plans the kind of fee disclosure that is coming under scrutiny with 401(k) plans.”
Wirtshafter said recent investigations into insurance industry practices and the overall heightened concern for cleaning up financial abuses also contributed to the new focus on pension plans. The good news, he said, is that the general climate of openness is better today than it was a decade ago.
“I can say with certainty that this was a much larger problem 10 years ago than it is today,” Wirtshafter said. “There used to be lots of side arrangements that were not disclosed, but the relationship is considered much more transparent than in the past.”
The SEC staff report and related guidance are available in the box above, right.
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