Retirement plans under scrutiny

Jul 9, 2007 @ 9:10 am

By Doug Halonen

WASHINGTON — The Department of Labor and Rep. George Miller, D-Calif., are considering separate efforts to crack down on pension consultant conflicts of interests following a report by the Government Accountability Office that said undisclosed conflicts could be lowering pension fund investment returns.

The key finding in the GAO report, which looked at 24 consultants, was that defined benefit plans using the 13 consultants that failed to disclose significant conflicts of interest had annual returns 1.3% lower than plans with 11 consultants that disclosed the conflicts. The GAO studied the four years ended Dec. 31, 2004.

The Labor Department’s Employee Benefits Security Administration announced that it will propose regulations soon that would require pension consultants and other plan service providers to disclose all of their financial arrangements, including indirect compensation and fees, to plan fiduciaries.

Mr. Miller, who as chairman of the House Education and Labor Committee requested the GAO study, is considering legislation that would require pension consultants to disclose conflicts, because he’s concerned that the conflicts are hurting plan participants.

Bradford P. Campbell, EBSA acting assistant secretary, wrote in a June 25 letter to the GAO that the DOL regulations “will ensure fiduciaries have the information needed to assess both the reasonableness of the fees and potential conflicts of interest by service providers, including pension consultants.”

In his letter, which was included in an appendix to the report, Mr. Campbell also said that the EBSA launched a national enforcement program last October to identify conflicts that “not only may affect a plan’s financial health but also may erode the confidence of plan fiduciaries that rely on consultants and advisers to assist them in carrying out their fiduciary duties.”

“We agree that undisclosed conflicts of interest by pension consultants and others who provide services to pension plans could constitute violations of ERISA, potentially resulting in losses to plans, particularly where the pension consultant or adviser uses its position with the plan to generate additional fees for itself or its affiliates,” he said in the letter.

Mr. Miller, as part of an effort to boost 401(k) participants’ returns, already is considering legislation that would enhance fee disclosure requirements. The consulting conflict disclosure provisions simply would be added to a fee disclosure bill. “We are considering legislation on fee disclosure that might also address conflicts,” said a spokesman for Mr. Miller.

But with the DOL promising a crackdown, some industry lobbyists said that disclosure legislation would be unnecessary.

“The current regulatory structure is addressing some of the problems addressed in the (GAO) report, and the Department of Labor has indicated that they will propose regulations refining their disclosure regime for service providers,” said Elizabeth Varley, vice president and director of retirement policy for the Securities Industry and Financial Markets Association, which has offices in New York and Washington.

But don’t count on lawmakers to abandon legislation, even if the EBSA follows through on its promise to regulate and moves first, said Bill Sweetnam, a partner with Groom Law Group in Washington.

“[Mr. Miller and other lawmakers] will look to see what DOL does, but I don’t think they’ll stand down,” he said. “They’re looking for more, not less.”

Although pension attorneys and others said that the GAO report could spur conflicts-of-interest legislation, consultants are likely to shine additional light on conflicts on their own.

“There clearly is a need for the industry to revisit and re-examine how it discloses fees and conflicts,” said Brian H. Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries, an Arlington, Va.-based organization that represents pension consultants.

“I would hope and expect that the industry would meet the needs of plan fiduciaries and the marketplace in advance of any requirements pursuant to legislation or regulations,” he added.

“I wouldn’t be surprised to see hearings, with the possibility of legislation, depending on what [Mr. Miller and other lawmakers] get out of the hearings and whether they get good publicity,” said Jason Bortz, a benefits attorney with Davis & Harman LLP in Washington.

In its report, the GAO said that many factors can affect the size of plan returns and that data and modeling limitations could affect the ability to generalize from its study.

“This finding, while suggestive, should not be considered as proof of causality between consultants and lower rates of return,” GAO officials said in the report.

The GAO study was based on a May 2005 Securities and Exchange Commission audit. The identities of the consultants have never been released because they were part of a confidential investigation, said SEC spokesman John Nester.

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