Study Hints At Bias of Advisers On Pensions

Many Consultants Have Ties to Providers

Many of the firms that provide advice to operators of pension and 401(k) plans appear to have undisclosed financial ties to companies whose services they recommend, according to a study released yesterday by the Securities and Exchange Commission.

The study, though of a small sample of the more than 1,700 registered investment advisers that provide pension-consulting services, raises questions about whether pension-plan operators and 401(k)-plan participants always get the unbiased advice required by federal law, SEC officials said.

"Pension consultants provide important advice to pension plans and their trustees with respect to identifying and selecting the money managers to manage the plan's money," said Lori Richards, director of the agency's Office of Compliance Inspections and Examinations.

More than half the consulting firms examined were found to provide products and services, such as software and consulting, to money managers and mutual funds at the same time they were helping pension plans choose such providers.

"In essence, these pension consultants have business ties to the same money managers who are vying for their attention to be recommended by the pension consultant" to the consultant's clients, Richards said.

And while the data the agency obtained from most of the consultants did not enable it to determine whether consultants skewed their recommendations to favor managers, in three of the six firms where such analysis was possible, it found that the consulting firm recommended money managers who purchased services from it more frequently than those that did not.

About a third of the consulting firms studied had a brokerage arm and provided brokerage services to pension plans and 401(k) plans they advised.

The study did not find evidence that money was lost by a pension plan as a result of the conflicts, but in the case of 401(k) plans, the "ultimate harm that could be caused" would be that the investment choices provided to an employee "would be based not on the money manager or mutual fund that is best for that employee but based on whether or not the pension consultant has received payment from that mutual fund," Richards said.

In addition, few consultants informed pension-plan clients of these relationships. Richards described disclosure information ranging from "none to very poor." She said most consultants did not realize that by law they have a fiduciary duty to the pension plan and must put the plan's interests ahead of their own.

The study, which began in December 2003, covered only 24 consulting firms, but Richards said they represented a "cross-section of the industry," which ranges from one-person operations to firms with several hundred employees. The firms included in the study were not identified.

"We do think these findings are very serious," Richards added.

Where the study turned up apparent violations of the law, she said, "our enforcement division is investigating. It is my hope and expectation that these firms will be dealt with in an enforcement context."

Richards said the SEC's aim is to prompt fuller disclosure by consultants and more and better questions by pension-plan sponsors and trustees. "I think disclosure will go a long way," she said.

But while sponsors of traditional pension plans have an incentive to pay attention to such disclosures -- the employer typically is obligated to make up any investment shortfall out of its own pocket -- sponsors of 401(k) and similar plans might not. In these retirement-investment plans, problems such as poor investment performance and high mutual-fund fees hurt workers but do not necessarily have much impact on the employer.

Richards said the law does not appear to require plans to disclose consulting relationships to workers.