SEC Is Probing Pension Conflicts

Federal regulators said Monday that they were investigating several pension consultants over possible conflicts of interest for failing to disclose significant payments from investment managers whose services they recommend to retirement plans.

Employers and pension plans hire consultants to advise them in a variety of areas, such as choosing money managers to oversee investments and selecting mutual funds to include in their 401(k) plans.

The Securities and Exchange Commission said it surveyed 24 pension and 401(k) consultants for possible conflicts. It found that 19 firms sold products and services to money managers but gave little or no disclosure to retirement-plan clients.

Pension consultants are allowed to sell investment software, training seminars and other products to money managers. But they have a fiduciary obligation to divulge such sales relationships because of “the potential to cloud the objectivity of the consultants’ advice,” said Lori Richards, director of the SEC’s office of compliance, inspections and examinations.

The Times reported Monday that the SEC had found conflicts of interest in the pension consulting business. Richards said the enforcement unit was now investigating potential disclosure violations at several specific firms. The SEC would not reveal the companies being probed.

For most of the firms surveyed, the SEC did not have sufficient documentation to determine whether they skewed their advice in favor of money managers who bought their services

But there was sufficient data for six of the firms, the SEC said. Three of those six recommended investment managers who bought their products more frequently than those who did not, the agency said.

Wilshire Associates Inc., a large pension and 401(k) consultant based in Santa Monica that also sells various software products to money managers, was one of the firms surveyed by the SEC.

The SEC sent Wilshire Associates a follow-up letter two months ago suggesting the firm improve its disclosure, said Kim Shepherd, a Wilshire spokeswoman.

“Although we felt we had sufficient disclosure in the past, we found the SEC suggestions helpful and are in the midst of implementing those suggestions,” Shepherd said.

Ted Siedle, a pension expert and former SEC lawyer, suggested that pension consultants who sell services to investment managers might have an incentive to recommend managers even if they have high fees or poor track records, which could mean reduced payouts or higher costs for plan participants.

Industry experts note that some consulting firms have money managers send pension and 401(k) stock trades through brokerages they own or with which they have financial arrangements -- giving consultants an incentive to recommend managers who trade frequently.

“Once we begin to understand how consultants benefit from kickbacks, that goes a long way to explaining why so many pensions and 401(k)s have such terrible performance,” Siedle said.

The SEC began its review of pension consultants in December 2003.