As Predicted -- Pension Plan Consultant's Conflicts under Scrutiny

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Los Angeles Times
June 29, 2007 Friday Home Edition

Conflicts of interest may hurt pension plans; Unreported business dealings can affect consultants' advice and drive down returns, a federal agency finds.
Jonathan Peterson, Times Staff Writer

WASHINGTON
Undisclosed conflicts of interest by pension consultants could be taking a bite out of your retirement plan.

In a report released Thursday, the Government Accountability Office said such conflicts appeared to drive down annual returns for traditional pension plans by 1.3% a year.
Pension consultants advise pension plans on a range of matters, such as investment goals, where to allocate assets and whom to use as money managers. Conflicts may arise if a consultant's advice is influenced by other, unreported business dealings.

Though lower returns are borne by the employer in such pensions, they can add up significantly over time and ultimately lead to benefit cuts, said lawmakers who requested the report.
The findings are the latest piece of evidence that retirement savings may be affected by business decisions made in pursuit of fees and profits rather than the worker's best interest. They follow congressional hearings on the effect of hidden fees and conflicts on 401(k) plans, and seemed likely to stir new calls for stricter oversight of the business arrangements that may affect retirement savings.

"Our overarching concern when it comes to hidden fees or conflicts of interest is this: Are the people entrusted with managing other people's money held to the highest possible ethical standard?" asked Rep. George Miller (D-Martinez), chairman of the House Committee on Education and Labor. "Are they looking to serve the best interests of the pensioners, or are they looking to line their own pockets? That's what this is all about."

Miller is preparing legislation that would address concerns about conflicts of interest and hidden fees in retirement plans, including traditional pensions and 401(k) plans.

In the report, government auditors described the lower returns as "suggestive" of the effect of undisclosed conflicts but stopped short of saying there was an absolute connection. The finding "nevertheless illustrates the importance of detecting the presence of undisclosed conflicts of interest" in pension plans, the GAO said.

The study built on a 2005 analysis by the Securities and Exchange Commission, which scrutinized the dealings of 24 pension consultants and concluded that 13 had conflicts that should have been revealed.

For example, the SEC found that pension consultants were often affiliated with brokerage firms that provided brokerage services to the consultants' client pension plans. It also found that pension consultants sometimes charged money managers to attend conferences and sold them software.

"Concerns exist that pension consultants may steer clients to hire certain money managers and other vendors based on the pension consultant's (or an affiliate's) other business relationships and receipt of fees from these firms, rather than because the money manager is best suited to the clients' needs," the SEC said in its analysis.

At the request of Miller and Rep. Edward J. Markey (D-Mass.), the GAO tried to figure out whether such conflicts cost people money.

Based on the finding, Miller said in a statement that there was "potentially a significant cost to workers and retirees when consultants or money managers have conflicts of interest."
Not everyone shared the concern, however. Mark Ugoretz, president of a group that represents major corporations on pension matters, said the report produced scant evidence of damage and based it on shaky assumptions about business relationships.

"They have made assumptions that these are conflicts of interest, and when they made these assumptions they found a minimal effect," said Ugoretz, of the ERISA Industry Committee (ERISA is an acronym for the Employee Retirement Income Security Act, the 1974 law that set pension standards). "That's not a sound basis on which to take legislative action."
Members of Congress, however, seized on the findings as a further sign that retirees could be victimized by obscure conflicts in the investment world.

"When it comes to the management of pension funds and workers' hard-earned savings, investment decisions should be driven by thorough analysis and research, not by the pursuit of fees that pad profit margins of consultants to the detriment of fund beneficiaries," Markey said.
Questions about the proper handling of retirement savings by financial professionals have become increasingly widespread in recent years, particularly as members of the baby boom generation start to reach their 60s.

The Labor Department is reviewing pension disclosure requirements and expects to unveil soon a proposal that would require pension consultants and other pension service providers to disclose details of their direct and indirect compensation, fees and "other financial arrangements," Bradford P. Campbell, an acting assistant Labor secretary, told the GAO in a letter.