IMHO:Disclose Sure?

Plan sponsors deserve to know the score

Like many in this industry, on May 16, I pored over the "Staff Report Concerning Examinations of Select Pension Consultants" with great anticipation. The document summed up the findings of the Securities and Exchange Commission following a 17-month investigation of "pay-to-play" practices, or at least allegations thereof.

The  document , which turned out to be a mere eight pages, offered little in the way of insight, IMHO. The "big story," at least judging by the subsequent headlines in the "mainstream" media, was that the SEC had uncovered "potential conflicts of interest" in the practices of pension consultants who—gasp—offered services to both investment managers and the plan sponsors who frequently rely on the guidance of those consultants to select and monitor the performance of investment managers.

To its credit, the SEC maintained a focus appropriate to its regulatory mission: in this case, SEC-registered investment advisors. However, of the 1,742 such entities that indicate they provide pension consulting services, the report only considered the practices of 24 (and only over a relatively short period of time). Among those 24, only 13 provided services to both investment managers and plan sponsors—and, even there, the SEC noted only that the "duality" in the customer base "may create a conflict of interest, which has the potential to cloud the objectivity of a pension consultant's recommendations."

The SEC drilled down—sort of—on a few specific behavioral areas: notably, certain investment conferences sponsored by those consultants, relationships with affiliated broker/dealers, the existence (or lack thereof) of policies and procedures regarding these business practices, and the disclosure (or lack thereof) of these potential conflicted relationships. A sticking point for the study's authors appeared to be the tendency toward a generic disclosure that various services are provided to money managers that "required the advisory client to infer that the consultant receives compensation from money managers."

Personally, I would hope that a pension plan sponsor could discern that money was changing hands without requiring that to be more specifically detailed. The SEC raised an interesting point in that line of inquiry, though—noting that, even in the single case in its analysis where a pension consultant made a client-specific disclosure that it provided services to the same money managers it was recommending, it failed to indicate the specific dollar amount. This, as the report points out, might indicate the magnitude of the conflict. At a minimum, one would hope that it would provide a point of inquiry and discussion.

Indeed, later that same day, Assistant Secretary of Labor Ann Combs commended the SEC on its report—and also reminded plan sponsors and other plan fiduciaries that ERISA "requires that plan fiduciaries must act prudently in selecting and monitoring service providers. Disclosure of a service provider's potential conflicts of interests would be an important part of the selection and monitoring process."

What I found most intriguing in the report, however, was the SEC's observation that many pension consultants do not consider themselves to be fiduciaries, and "believe they have taken appropriate actions to insulate themselves from being considered a 'Fiduciary' under ERISA." What is not explicitly stated—but, IMHO, clearly implied—is that those "beliefs" notwithstanding, the SEC at least may be of a different mind.

As potentially conflicting as some of these arrangements between consultants and investment managers may be, IMHO it pales in comparison with the unseemliness of the urgency with which some scramble to avoid a fiduciary's accountability for their actions and recommendations. Plan sponsors surely are entitled to information about potential conflicts of interest in these trusted relationships—but how much better if the potential conflicts were removed altogether?  

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Nevin Adams
editors@plansponsor.com