(June 9, 2014) — Lawmakers have raised concerns to the Department of Labor of possible conflicts of interest from consultants also acting as asset managers, according to a letter addressed to Labor Secretary Thomas Perez.
In the May 21 letter, Senior Democratic Congressman George Miller pointed to “significant and inappropriate conflicts for pension consultants in their dealings with their employee benefit plan clients,” and urged Secretary Perez to take a careful look. Miller is a ranking member of the Education and the Workforce Committee.
“As revenues and margins in the pension consulting business have come under pressure, it appears that more and more firms have sought to transition these relationships from a pure consulting model to one where the consultants step into the role of becoming a manager of the plans’ assets,” Miller wrote.
Furthermore, Miller said consultants serving dual roles have the possibility of failing to act as “gatekeeper” of the plans’ assets and investments, as fiduciaries, running the risk of potential pay-to-play arrangements.
“In effect, the consultant firm may recommend itself as a manager and thereby receive additional (or higher) fees, a classic conflict of interest,” Miller argued. “In addition, even small increases in fees can, over time, have a significant effect on plan assets.”
The congressman said these conflicts are not only a “breach of fiduciary duty,” but also illegal under the Department of Labor’s Employee Retirement Income Security Act.
Miller’s letter isn’t the first time consultants have been under fire.
Last November, the New York Financial Services Superintendent Benjamin Lawsky subpoenaed consultancy firms working with the state’s public pension plans for clarifications of their working practices. Around 20 firms, including big names such as Callan Associates, Russell Investments, Towers Watson, and Wilshire Associates were questioned.
A report by the Diligence Review Corporation last year also found glaring evidence of consultants serving two roles: 10 pension consulting firms were registered representative of broker-dealers, 33 had broker-dealer affiliates, and 12 received compensation for client referrals.
California State Teachers’ Retirement System (CalSTRS), the second largest US public pension plan, said while there is no regulation barring consultants from being money managers, it is fully aware of potential conflicts of interest. Despite the evident high profit margins of the asset management side, the $184 billion fund said it prefers “pure consulting.”
“It’s the difference in the level of confidence you’d have in an estimate for services from someone whom you both know will not also be doing the work versus one who is trying to sell you his or her services,” Ricardo Duran, spokesperson for CalSTRS, told aiCIO. “There might not be a problem but, in the second instance, there is suspicion of doubt.”
Some consultants have agreed that their business has become less than ideal and in need of a new kind of innovation.
“I agree that, across the consulting industry, there is a real hesitancy to innovate as resource-constrained firms prefer to protect their businesses by failing conventionally (with little risk to their franchises) rather than seek to succeed unconventionally and put their franchises at risk if they are wrong,” Erik Knutzen, former CIO of NEPC, told aiCIO in February. “However, we very much try to avoid band-wagoning with every new idea that comes along.”
For such reasons—and to avoid potential conflicts of interest—certain funds, such as UPS and BP America, chose to forego consultants and bring all due diligence and monitoring in-house.
“My team, as fiduciaries, acts solely in the interests of plan participants and beneficiaries,” Greg Williamson, CIO of BP America’s pension funds, told aiCIO last June. “My dedicated, fully-focused team understands the nature of the plans’ liabilities, the risk appetite of the investment committee, and the sponsor’s ability and desire to fund the plans better than a third-party organization with its own, non-aligned business objectives.”
Consultant firms such as Aon Hewitt, Mercer, and Wilshire Associates declined comment on Congressman Miller’s letter at time of press.
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