Conflicts Seen for Advisors to Pension Plans

A yearlong investigation by the Securities and Exchange Commission has found that many pension and 401(k) consultants receive large hidden payments from the investment firms they recommend to retirement-plan clients, according to people familiar with the matter.

The SEC, in a report to be released as early as today, is expected to say that the pension and 401(k) consulting industry is beset by widespread conflicts of interest that often are not properly disclosed to clients.

Pension and 401(k) administrators rely on consultants to help them pick money managers and specific investments for the millions of workers in their plans. The consultants supposedly sift through investment strategies and track records to identify the most capable managers.

But the SEC found that many consultants don’t reveal that their advice may be influenced by their extensive business ties to the investment firms, according to the sources.

For example, some consultants hold investment conferences that money managers pay large fees to attend. Consultants also sell various research, technology and data services to the investment firms.

There is nothing inherently wrong with selling services to money managers, but consultants have a fiduciary obligation to disclose conflicts that may taint their advice.

What frequently happens, critics say, is a pay-to-play arrangement in which consultants recommend money managers that buy their services rather than those with superior investment credentials.

“It’s like the Wild West,” said Ward Harris, managing director of McHenry Consulting, an independent retirement plan advisory firm in Emeryville, Calif., who has been critical of many industry practices. “If you get paid by the plan and at the same time you’re selling consulting or software or data to the money managers, that’s a conflict of interest,” Harris said.

The undisclosed conflicts could saddle pension and 401(k) participants with underperforming or high-cost investments that drain their retirement nest eggs.

“There are a lot of losers,” Harris said. “The No. 1 loser is the participant in the plan. The No. 2 loser is the taxpayer because we’re subsidizing this.”

Investment firms are eager to manage money for pensions and 401(k)s because such work can be extremely lucrative. It’s a stable business that generates increasing profits as assets grow.

In some cases, according to critics, money managers have little use for the consultants’ services and buy them solely to curry favor.

Selling services to money managers can often be more profitable than advising retirement plans, Harris said.

The SEC could potentially recommend rule changes to correct problems in the industry, such as requiring greater disclosure of relationships between pension advisors and investment managers.