The GAO said that, while no complete information exists about the presence of conflicts-of-interest at pension plan service providers, a 2005 Securities and Exchange Commission (SEC) examination of the activities of 24 pension consultants from 2002 through 2003 revealed that 13 failed to disclose significant ongoing conflicts-of-interest. SEC found that the 13 pension consultants or their affiliates had conflicts because they provided products and services to both pension plan clients and money managers or mutual funds without adequately disclosing these arrangements.
According to the report, the conflict is created because the pension consultant that might be more inclined to recommend to pension plans the money managers that buy consultant products because those business relationships are profitable for the consultant. As examples, the GAO said the SEC study found 10 pension consultants or their affiliates sold analytical software packages used to analyze and improve performance of client investments and 13 pension consultants hosted conferences attended free by pension plan advisory clients and attended by money managers for a fee. The GAO suggested these consultants would be more inclined to recommend these money managers to pension plan clients in order to keep the business.
The study also found the majority of pension consultants examined had business relationships with broker-dealers that raised a number of concerns about potential harm to pension plans, the GAO said. In certain directed brokerage arrangements, trades may be directed through a broker-dealer that was affiliated with the consultant as a means for paying fees a plan owed to its consultant using a portion of the brokerage commission. These arrangements raised concerns that plans might not have received the best price for each trade or best execution because the directions may have restricted the money manager’s ability to select a broker-dealer that was the best able to execute a trade. The report said the arrangements also raised the concern that consultants might be overpaid.
Other conflicts-of-interest mentioned by the GAO not necessarily related to advisers included plan loans for personal interests of plan fiduciaries, redirection of plan assets for business or personal uses, and plan decisions presented to trustees creating a conflict between participant interests and sponsor interests.
Using data from the SEC study, the GAO performed an analysis that indicated lower rates of return for plans associated with an adviser who failed to disclose conflicts-of-interest. The average return for plans using a consultant without disclosure violations was 4.5%, while the average return for plans using a consultant with disclosure violations was 3.2% to 3.3%, the report said.
The GAO pointed out that policies and procedures of the Pension Benefit Guaranty Corporation (PBGC) are not focused on identifying conflicts-of-interest, and while enforcement procedures of the Employee Benefits Security Administration (EBSA) address conflicts for all private pension plans, they do not explicitly address conflicts for plans trusteed by or likely to be trusteed by the PBGC.
The GAO announced in its report that the EBSA has initiated a new enforcement project known as the Consultant/Adviser Project (CAP), mainly focused on issues identified in the SEC's 2005 study of pension consultants. Through the project, EBSA also hopes to identify other service providers that may be using or managing plan assets for personal benefit.
Specifically the agency will look for improper, undisclosed compensation such as kickbacks, pay-to-play arrangements, and soft dollar arrangements, the GAO said.
In addition, to acquire more information about the fees charged by service providers, the EBSA, IRS, and PBGC recently proposed several revisions to the Form 5500 (See Regulators Unveil PPA Changes to Form 5500 ). Among the many changes, the revised form would require increased disclosure regarding the types and amounts of payments made to service providers, including amounts paid via third-party arrangements, both direct and indirect, the GAO report said.
The GAO report is here .