Printer Friendly Version
The Employee Retirement Income Security Act (ERISA) requires that
fiduciaries of employee benefit plans administer and manage their plans
prudently and in the interest of the plan’s participants and
beneficiaries. In carrying out these responsibilities, plan fiduciaries
often rely heavily on pension consultants and other professionals for
help. Findings included in a report by the staff of the U.S. Securities
and Exchange Commission released in May 2005, however, raise serious
questions concerning whether some pension consultants are fully disclosing
potential conflicts of interest that may affect the objectivity of the
advice they are providing to their pension plan clients.
Under the Investment Advisers Act of 1940 (Advisers Act), an investment
adviser providing consulting services has a fiduciary duty to provide
disinterested advice and disclose any material conflicts of interest to
their clients. In this context, SEC staff examined the practices of
advisers that provide pension consulting services to plan sponsors and
trustees. These consulting services included assisting in determining the
plans investment objectives and restrictions, allocating plan assets,
selecting money managers, choosing mutual fund options, tracking
investment performance, and selecting other service providers. Many of the
consultants also offered, directly or through an affiliate or subsidiary,
products and services to money managers. Additionally, many of the
consultants also offered, directly or through an affiliate or subsidiary,
brokerage and money management services, often marketed to plans as a
package of bundled services. The SEC examination staff concluded in its
report that the business alliances among pension consultants and money
managers can give rise to serious potential conflicts of interest under
the Advisers Act that need to be monitored and disclosed to plan
fiduciaries.
To encourage the disclosure and review of more and better information
about potential conflicts of interest, the Department of Labor and the SEC
have developed the following set of questions to assist plan fiduciaries
in evaluating the objectivity of the recommendations provided, or to be
provided, by a pension consultant.
You can check yourself - and view the firm’s Form ADV - by searching
the SEC’s Investment Adviser Public Disclosure Web site. At present, the
IAPD database contains Forms ADV only for investment adviser firms that
register electronically using the Investment Adviser Registration
Depository. In the future, the database will expand to encompass all
registered investment advisers - individuals as well as firms - in every
state. If you can’t locate an investment adviser in IAPD, be sure to
contact your state securities regulator or the SEC’s Public Reference
Branch.
When pension consultants have alliances or financial or other
relationships with money managers or other service providers, the
potential for material conflicts of interest increases depending on the
extent of the relationships. Knowing what relationships, if any, your
pension consultant has with money managers may help you assess the
objectivity of the advice the consultant provides.
Payments from money managers to pension consultants could create
material conflicts of interests. You may wish to assess the extent of
potential conflicts.
Probing how the consultant addresses these potential conflicts may help
you determine whether the consultant is right for your plan.
You may wish to avoid any payment arrangements that could cause the
plan to pay more than it should in pension consultant fees.
Where and how brokerage orders are executed can impact the overall
costs of the transaction, including the price the plan pays for the
securities it purchases.
As noted above, you may wish to explore the consultants’
relationships with other service providers to weigh the extent of any
potential conflicts of interest.
All investment advisers (whether registered with the SEC or not) owe
their advisory clients a fiduciary duty. Among other things, this means
that advisers must disclose to their clients information about material
conflicts of interest.
If the consultant is a fiduciary under ERISA and receives fees from
third parties as a result of their recommendations, a prohibited
transaction under ERISA occurs unless the fees are used for the benefit of
the plan (e.g., offset against the consulting fees charged the plan) or
there is a relevant exemption.
The answer may help in evaluating the objectivity of the
recommendations or the fiduciary status of the consultant under ERISA.
For more information on the SEC staff’s findings, please read “Staff
Report Concerning Examinations Of Select Pension Consultants”. Plan
trustees, pension consultants, and other service providers can learn about
their fiduciary responsibilities under the Employee Retirement Income
Security Act (ERISA) by visiting the Web site of the U.S. Department of
Labor. Pension consultants who have questions concerning their obligations
under the Investment Advisers Act of 1940 should either consult with an
attorney who specializes in the federal securities laws or contact the
staff of the SEC’s Division of Investment Management.
This fact sheet has been developed by the U.S. Department of Labor, Employee
Benefits Security Administration, Washington, DC 20210. It will be made
available in alternate formats upon request: Voice phone: 202.693.8664;
TTY: 202.501.3911. In addition, the information in
this fact sheet constitutes a small entity compliance guide for purposes of
the Small Business Regulatory Enforcement Fairness Act of 1996.
|